PensionsJan 18 2022

MPs call for advice boost in wide-ranging pension access report

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MPs call for advice boost in wide-ranging pension access report

The work and pensions committee is calling for a full review of the pensions advice allowance, new definition of enhanced guidance, and better advice take up in a wide-ranging report assessing the government's pension freedoms policy.

The report 'Protecting pension savers—five years on from the Pension Freedoms: Accessing pension savings', published this morning (January 18), highlighted a number of areas where savers need more support with their pensions.

Pension freedoms, implemented in 2015, was a radical reform of pension rules at the time, allowing many to access their savings freely for the first time. With this came difficult decisions, which many savers were not equipped to make.

In today's section of the MPs' work assessing the reforms, they focused on accessing pension savings. The MPs said the government and regulators needed to play a more active role than they did when the pension freedoms were first introduced to help guide savers.

They should collect more research and data on the use of pension freedoms and ensure that savers have the information and support they need to make good decisions about what they do with their pension savings.

Overall, the MPs found the thrust of pension policy has been revolving too much around what is happening to pension pots, rather than the individuals who are relying on this money for their later life security.

In line with this they also examined people's access to advice, in particular the advice allowance, advice/guidance definitions, and advice take up.

Here is what they found:

Advice allowance

The MPs said due to a lack of awareness and lack of demand the advice allowance was not working.

It stated that its design has made it unusable by most savers, and while the broad aim of the policy was correct, it has been poorly executed and now needs to be rethought.

The advice allowance, which came into being in April 2017 following a recommendation in the Financial Advice Market Review, allows pension scheme members to withdraw £500 a year tax-free, up to three times in their life, to pay for financial advice.

However, uptake has been low with few providers offering this service to clients.

The MPs have suggested the government should remove the annual limit and uprate the overall advice allowance in line with inflation each year.

The committee has also called on advisers as well as the Money and Pension Service to take a more proactive approach and signpost savers to this allowance.

Where it does not make sense for savers to use the allowance, such as those with small pot or defined benefit schemes, advisers should instead look to offer triage services, the MPs said.

But back in June 2021, MPs were told that increasing the amount of cash savers are allowed to take from their pension pot to access advice will not be beneficial to most savers due to supply issues with advisers.

The government and regulators told the committee there may be a more significant role for the pensions advice allowance in future. 

David Fairs, executive director at the Pensions Regulator, said: “In the context of where we are at the moment, it is not untypical that individuals reach retirement with 50 per cent of their wealth from defined benefit and 50 per cent from defined contribution. That allowance may become more important in time as individuals increasingly have their wealth within defined contribution.”

In addition, Sarah Pritchard, executive director of markets at the FCA, said providers “are not required to signpost the existence of the personal advice allowance” and that if the “government wished to take a view on the advice allowance [ … ] it would be important to also look at how consumers can be supported in understanding that it exists and who it is available to”.

Advice definitions

The MPs also looked into whether there was a definition between advice or guidance, such as enhanced guidance or limited advice, which might be able to bridge the gap.

Generally submissions viewed enhanced guidance as guidance which took greater account of people’s personal situation and limited advice as a broad recommendation based on limited information about a person’s situation.

But the MPs found a reluctance from the industry to operate too closely to the advice/guidance boundary. The Money and Pensions Service too did not want to go near it, both because of the likely additional cost and regulatory requirements. 

The committee therefore recommended that the FCA should define enhanced guidance as “guidance on the options available which is tailored to an individual dependent on the information they provide, without a recommendation. This is not a regulated activity.”

Whereas limited advice would be defined as “a recommendation made to an individual based on limited or partial information about them”.

The report stated: “The Financial Conduct Authority should provide examples to the industry to encourage the wider offering of enhanced guidance and limited advice to the fullest extent allowed by the existing law.”

It was also suggested that the Money and Pensions Service should be able to offer enhanced guidance through its pensions services but that it should establish an industry group to “develop best practice proposals and templates for offering enhanced pensions guidance”.

Boosting advice take up

The MPs raised concerns about the low numbers of people willing to pay for financial advice. 

The Investing and Saving Alliance (Tisa) told the MPs that individuals not receiving appropriate guidance or regulated advice was “the biggest single issue that needs to be resolved”.

Meanwhile the FCA said it was not clear what prompted the low take-up of financial advice. 

Pritchard said: “We know from our financial lives survey most recently that only 8 per cent of adults receive financial advice. That is a very low percentage of the population. [ … ] I don’t think that we are able to provide a view on whether it is the level of financial support that is prompting low takeup of advice or whether it is because consumers are not engaged and have disengaged from pensions because they find them too complex, but it is clear that take-up rates of advice are low.”

In an attempt to improve the number of people willing to pay for advice, the report suggested the government should report annually on progress and plans to increase the uptake of pensions advice.

Stephen Timms, chairman of the work and pensions committee, said: “Without intervention to drive up dramatically the numbers receiving advice and guidance, savers will make poor decisions – and, in far too many cases, become scam victims – and the pension freedoms, far from living up to their name, will instead trap people in an increasingly confusing web of complexity.”

amy.austin@ft.com

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