Kevin Hollister, pensions actuary and founder of Guiide
There is so much talk about the advice gap around pensions but to date there has been little action to bridge it. What can actually be done to help close the gap?
Work and Pensions Committee
The work and pensions committee recent report, protecting pension savers – five years on from the Pension Freedoms, came up with the following clear conclusions
- Many people seem unwilling to pay for financial advice for the decisions they make about their pension savings
- The Government and regulators need to enable savers to make their own decisions, ensuring that they don’t default to a decision against their best interests
- Savers need more support than they currently receive in order to make good decisions about how they access their pension savings
People seem reluctant to take advice for three key reasons – cost, fear and trust.
Some view advice as too expensive. Many are unsettled about providing details on their financial information, or do not wish to seem uneducated on the subject. Some just do not trust the advice industry as a whole, or do not know where to turn for high quality advice.
Many members do trust their employer, or their pension schemes. Many would expect this to be the first place they should be able to access help from.
Unfortunately we know from our own surveys (and those of others) that around 80% of pension savers believe they do not get enough support from these places, where they expect to turn to first to get it.
What do people need?
Pension savers need the following:
- Initial modelling and guidance, before they even seek advice (newly termed as “enhanced guidance”)
- Signposting to the right type of advice, from a high quality adviser, if they need it
Initial modelling and guidance
Lots of savers want to understand what their retirement may look like, before even considering advice.
All they want to know initially in simple terms is:
- Can I get what I need
- For as long as I am likely to need it for
- Using everything I already have, can access in future, or will build up over time.
They do not need advice at this stage, they just need some help.
- Most won’t know what they need. They need help on this to understand what various income levels mean in terms of actual retirement lifestyles.
- Nearly all won’t know how long they are likely to need it for, they will need to understand a basic estimate of their life expectancy, which most will underestimate.
- Many simply won’t know everything they have, what they can access, or how they can use it. They need simple access to clear information on what they have and accessible modelling tools to understand how to use it.
There have been great leaps in recent years in some of these areas, the Pension & Lifetime Savings Association’s Retirement Living Standards is one example.
Pension dashboards, both commercial and the planned Government launch, lower cost providers and ready made investment strategies and pathways have also all helped the pension saver immensely.
It is access to the answers above within one comprehensive journey that is the first step needed for many. These help the saver to understand what they are saving for and is their desired outcome feasible and achievable.
This help alone, can greatly reduce the advice gap for a high percentage of pension savers.
Armed with this understanding, savers can then decide for themselves if they need further advice. For many this modelling and guidance will not be enough. They will also need advice on a suitable investment strategy, the correct mixture of pension products and other possible non- pension sources of income, tax minimisation and estate planning to achieve the best outcome possible.
Advice to individuals who have engaged with this initial guidance process, can be much more focused on the particular issues for the saver’s specific circumstances.
How to bring guidance tools and advice together?
This is exactly what we are now trying to progress. Guiide are offering schemes and employers the enhanced guidance tools their members need, with clear signposting to high quality, experienced advisers, overlaid with adviser governance oversight.
For the 80% of schemes that have not appointed an adviser directly, this is a simple to implement approach to provide the support their employees and members need that can cost nothing.
It’s evident that the advice gap exists and will continue to grow over time unless action is taken now. More and more defined contribution pension savers will move towards retirement and have to make very difficult decisions regarding achieving their retirement goals.
Now there is a simple, low cost or even free solution for any scheme or employer who wishes to close this gap for their employees or members.
If as an industry we really want to bridge the pensions advice gap, there now seems little reason not to do so?
Kevin Hollister, is a pensions actuary, founder of Guiide and contributes to the Institute and Faculty of Actuaries working party on decumulation.