The spotlight on retirement advice and income is intensifying for wealth and advisory firms. The FCA is scrutinising firms to ensure they offer robust and scalable retirement income advice propositions that differ from accumulation strategies and address the new risks emerging throughout retirement.
With an ageing population, the retirement market is poised for significant growth. The number of people aged 65 and over has increased from 9.2 million to over 11 million between 2011 and 2021. Defined contribution (DC) assets have grown by almost 30% since 2019, with the DC market estimated at £1.9 trillion and £220 billion in drawdown at the end of 2023. This trend indicates a growing need for decumulation advice.
Retirement planning also dominates client advice requests (90%), surpassing investments (65%) and tax planning (42%). The report indicates that clients are demanding more support and engagement throughout retirement.
Charles Stanley’s report, “Decumulation: It Requires a Different Approach,” explores insights from financial advice firms on the challenges of decumulation. It highlights how advice at the start of and during retirement differs significantly from accumulation advice, with firms deploying various strategies to address new risks such as spending uncertainty, tax changes, longevity, investment, and sequencing risk. The stakes are higher for clients who cannot recoup losses from income.
A consistent concern among advisers is the regulatory challenges in the decumulation phase. Firms must demonstrate that they are supporting their clients in line with Consumer Duty. This includes ensuring the right systems, processes, and controls are in place, and that adviser tools, such as cash flow modelling, support clients in decumulation.
The retirement landscape has evolved, requiring tailored advice for different client needs, as outlined by the FCA. With the shift away from Defined Benefit pensions, there is no longer a standard retirement path, necessitating product innovation and investment solutions to manage the various risks in decumulation.
Among the diverse solutions used by firms, from annuities to hybrid and bespoke strategies, the development of Centralised Retirement Propositions (CRPs) is of particular interest. Some firms have adapted their Centralised Investment Propositions to create CRPs, while others are developing distinct CRPs, encouraged by the FCA’s endorsement of this practice.
Sean Osborne, Group Head of Sales at Charles Stanley, said: “The growth in the retirement market is truly enormous and not to be underestimated. The Consumer Duty and Thematic review of Retirement Income Advice clearly shows that this is a priority for the FCA, and there is an expectation for advice firms to develop a centralised retirement proposition that balances the need for flexibility that individuals need alongside providing a consistent approach across the firm.
“While decumulation attracts significant regulatory scrutiny, it also presents a substantial opportunity for advisers and advice firms to deliver innovative advice at this critical time in clients’ financial lives.
“In the future, it will be crucial for advice firms to implement centralised retirement propositions tailored to individual needs to support clients through retirement. Approaches designed for the accumulation phase will no longer suffice to meet all clients’ needs.”
Bradley Northrop, Partner and Head of the Retail Distribution practice at Alpha FMC, said: “We were delighted to support Charles Stanley with this exciting research into decumulation and the options employed by advisers when generating income for their clients.
“We found broad recognition that advising clients in decumulation necessitates a different approach, the stakes are higher and the risks are different. Our research found a varied approach to the use of investment strategies with some firms exhibiting limited differentiation as advisers transition to support their clients into decumulation.
“We expect to see that a wider set of products and investment solutions will need to be considered by firms in the future to evidence how clients’ income needs are being sustainably addressed throughout their decumulation journey.”
