Is the cost of retirement advice putting people off?

This view is confirmed by new research published last week by Money Minder, a Lincolnshire-based investment and pensions IFA. It focused on pre-retired people, aged between 55 and 67, who are not in a final salary or defined benefit pension scheme.

There are an estimated 3.1m people at this crucial age who need to make some important decisions. Many people are either scared to even think about their finances or presume there is no point. When I have talked to people in that age group, most have given little practical thought to their retirement.

Why? Anecdotally, there are a variety of reasons. Top of the tree seems to be the excuse: “I’ve been busy getting on with more important things, like life”.

But many people are either scared to even think about their finances or presume there is no point and things will sort themselves out.

The pension firms should be legally forced to ensure their customers make informed and considered decisions. For those who say they do not want to take investment advice, the reason is largely cost.

However, Money Minder’s research reveals three-fifths of 55 to 67-year-olds are worried it will be difficult to make ends meet in retirement. Around half have no idea what they are going to do with their pension choices, but the majority say they simply will not pay for the advice they need.

Just over three-fifths say they are not prepared to pay for retirement planning advice. That is a worrying figure. Without getting decent advice, what will become of these people? Are they likely to make the wrong choices about their pension pot options? You bet.

That was made clear by the FCA’s Retirement Outcome Review final report, published last week. It reported that many people are making poor financial decisions by taking some of their pension pot in cash.

‘Clampdown’ on charges

Whose fault is that? The pension providers, according to an enraged Trade Union Congress.

Its pensions officer, Tim Sharp, said: “The report reveals a retirement income market that often overcharges and confuses people. We need a clampdown on rip-off charges.”

That is certainly something to consider, but that will not help people make the right retirement decisions. When it comes to drawdown, the FCA report concluded that someone who wants to draw from their pot over a 20-year period could increase their expected annual income by more than two-thirds (37 per cent) by investing in a mix of assets rather than just cash.

This may seem obvious to you, but it is not obvious to the many masses who remain a little fearful of investments and are likely to only focus on how much cash they can get their hands on.

The regulator’s study also revealed that almost all (94 per cent) of people who accessed their pots without taking advice accepted the drawdown option offered by their pension provider, even though it probably was not the best solution for them. I am pretty sure that is because most people simply focus on the prize – the monthly income – rather than looking at the bigger picture.

How many people who took financial advice chose their pension provider’s drawdown option? Just a third. I cannot think of a simpler way that demonstrates the importance of advice for those older people who have such an important financial decision to make.

As the City watchdog reported: “Holding funds in cash may be suited to consumers planning to draw down their entire pot over a short period. But it is highly unlikely to be suited for someone planning to draw down their pot over a longer period.”

Pensions passport

What is the FCA’s solution to encourage people to engage with their pension choices? It is effectively the good old pensions passport that has long been called for by many members of the financial services industry.

The regulator wants pension firms to post wake-up packs to 50-year-olds and then for every five years until they take their pension pots. It said the packs must include a single page summary – a pensions passport – as well as including specific retirement-risk warnings. 

For those consumers that get the wake-up packs, read them, understand them and take action based on their new-found-knowledge, the solution is a perfect one.

But what about those consumers, which I reckon will be in the majority, who ignore the packs for whatever reason?

We cannot force them to take advice, can we? Well, yes, we should.

The pension firms should be legally forced to ensure their customers make informed and considered decisions. For those who say they do not want to take investment advice, the reason is largely cost. Money Minder’s research suggests only 4 per cent would be happy to pay the £500-£750 typical cost of retirement advice.

Thus, that cost should be met by the pension provider as part of their duty of care to the client. I reckon they could lower their charges, cover advice costs, and still make a decent profit out of their customers.

Simon Read is a freelance journalist