Every year, around 700,000 people (£45bn of pots) start accessing their pension pots. These new retirees have big decisions to make about their future retirement income.
Around 250,000 enter drawdown, with around 120,000 (£6bn of pots) not taking advice. Advice is not compulsory so they have every right not to, but managing retirement income so you do not run out of money over your lifetime is hard, very hard.
The new consumer duties have an overriding principle that “A firm must act to deliver good outcomes for retail customers”
Will this principle lead to more support directly from providers of pension products for their customers who have not taken advice? We think it has to.
How will firms prove this for non advised customers?
It is difficult to see how the provider of a drawdown product, be it a personal pension or commercial Mastertrust can demonstrate that the product delivered a good outcome, if the customer (or member) did not have a long term drawdown plan.
Put simply, if the customer does not have the capability to build themselves a long term plan, then clearly drawdown is not a suitable product for them. Instead, a guaranteed income (annuity) is the only viable solution for them.
Let’s fast forward a few years to when the FCA is looking for evidence the firm acted to deliver the best outcome. The member has extinguished their pots and has run out of money.
If the firm cannot evidence that the drawdown plan was expected to last and achieve a viable retirement income (with the key being, alongside everything else they have), customers will have every right to challenge that the firm did not act to deliver a good outcome.
Is more help and support coming for customers?
Given the above, we can see this principle, by default, requiring firms to provide more guidance tools and support for customers, both at retirement and throughout retirement. This will allow customers to understand the consequences of starting and continuing with any drawdown strategy.
In simple terms, without this support (or without restricting their products to being suitable alongside advice only) the firm can never demonstrate that it acted to deliver a good outcome for the customer.
The industry has been very slow to support customers in this way, but we believe the consumer duties will mean that retirement planning tools (using everything a customer has, not just the product alone) will become a prerequisite for any providers offering non advised drawdown products.
This can only be good news for non-advised consumers.
The effect of pension payments on tax and benefits?
On a slightly different note, but one relating to the lack of support at retirement.
This is the question of how retirement pots are accessed and their effect on tax and benefits payments. This seems like a can labelled worms, that no one wants to open and discuss.
We know around 400,000 people cash in their whole pots each year. They are mainly smaller pots, but this action can have two significant effects on the customer.
Firstly, additional tax may be paid. Delaying or spreading withdrawals, when the marginal tax rate may be lower is clearly in many people’s best interest.
Secondly, for many working people on means tested benefits, if the after tax lump sum is retained in a bank account, this may affect benefits eligibility and reduce the customer’s total income.
Even if the pot is taken not as a lump sum, but as a long term income via a series of drawdown income payments or a guaranteed income for life purchase (annuity), this can dramatically affect means tested benefits.
In some cases this new pension income can mean a £ for £ loss of benefit income, meaning the customer loses their whole pot, for no additional overall income.
Again customers need support to understand these issues. Providers must be able to demonstrate they are acting to deliver good outcomes and we hope this naturally means this support is more widely available as part of any retirement planning tools.
It is simply not good enough for the pensions industry to be looking back in five years time and wonder why all these people were not supported in their decisions.
Kevin Hollister, is a pensions actuary, Founder of Guiide and Guiide DB.
