The Work & Pensions Committee's Pension freedoms report, published on 5 April, has recommended that by April 2019 all income drawdown policy providers offer a 0.75 per cent-charging ‘default decumulation pathway’, designed to protect disengaged customers who otherwise may make poor investment and decumulation choices.
Either trustees or independent governance committees (IGCs) would choose both a default fund and a default level of regular income to take out.
With independent experts setting defaults for the two big questions facing drawdown customers, will anyone need an IFA?
Minimum engagement
The committee is responding to increasing concerns that a combination of automatic enrolment (AE) and pension freedoms has created what the Pensions Policy Institute has rightly called a ‘dichotomy in the system’.
This is where an increasingly large percentage of pension savers are encouraged to follow defaults offered to them by their employer, and therefore disengage during accumulation, but then need to become highly engaged at retirement when there are tough product and investment choices to make.
The numbers do not lie: we know the vast majority of AE policyholders stick with statutory minimum contribution levels.
I believe many people with more than £100,000 in retirement savings could be in the market for regulated financial advice as they get close to retirement.According to the Pensions Regulator, 92 per cent of AE pension holders are then invested in default funds which, according to Hargreaves Lansdown, underperform average global equity funds by 3.72 per cent a year.
There is no doubt that for the many who have lived out their accumulation period without making any proactive retirement savings decisions (beyond not opting out of AE), it makes absolute sense to drop automatically into the incumbent provider’s IGC-guided drawdown policy, investing in default funds and a ‘pathway’.
However, the default decumulation pathway offered by the incumbent provider will not be for everyone.
It clearly cannot consider a member’s personal situation and other pension and potential retirement income sources. IFAs can offer a much more tailored service, helping clients to determine their essential and lifestyle income needs, together with a desired legacy to leave to loved ones.
Then a withdrawal strategy can be built around other sources of income: their state pension, defined benefit pension and annuities.
Tailor-made advice
The average defined contribution pot size of the 55 to 65 age group is now £105,496, according to Aegon.
I believe many people with more than £100,000 in retirement savings could be in the market for regulated financial advice as they get close to retirement.
The only question is, can IFAs locate these customers as they approach retirement, offering them a tailor-made decumulation service that builds personalised retirement plans for customers?
Retirement plans will need the flexibility to alter course if investment performance dips or income demands increase. Pension freedoms have opened up a world of decumulation choices.
The market will be creating even more options for blending drawdown with guaranteed or annuitised income through innovative products in the coming years as the baby boomer generation moves into full retirement.
A word of caution: remember the scorn that is now poured on fund managers who charge for active management but turn out to be ‘closet trackers’.
IFAs that charge for decumulation advice and then recommend solutions similar to the new default pathways would be in the same camp.
IFAs must not lose sight of the fact that default pathways will not work for everyone. The fact that 63 per cent of drawdown policy purchases are already fully advised, speaks for itself.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
