Cross party politicians and industry urge government action on retirement income
The impending regulatory environment for financial advice (RDR) may result in an ‘advice gap’ where the poorest and least well-off pensioners will fail to receive critical financial advice, argues the International Longevity Centre – UK (ILC-UK)
Alongside the publication of “The Retail Distribution Review and small pension pots”, by ILC-UK, with the support of pensions specialists, Partnership, a cross party group of MPs and senior representatives of the financial services industry, have urged the Government and FSA to act to ensure that the Retail Distribution Review does not widen the advice gap for people with small pension pots.
ILC-UK has today published an open letter to Mark Hoban MP (Financial Secretary to the Treasury), Steve Webb MP (Minister for Pensions, DWP) and Lord Adair Turner (Chair, FSA) calling on the Government and FSA to host a ‘retirement income summit’ to protect the poorest and least well-off pensioners. The letter has been signed by senior Conservative, Labour, and Liberal Democrat politicians.
The letter states - “We believe there is a significant risk that the impending regulatory environment for financial advice (RDR) may result in an ‘advice gap’ where the poorest and least well pensioners will fail to receive much needed financial advice. In turn they run the risk of having less income in retirement. With one in six pensioners already living in poverty, these people need more income in retirement – not less!”
In “The Retail Distribution Review and small pension pots”, ILC-UK recommends that:
- the government and the FSA should investigate in more detail the opportunities to mitigate the implications of RDR for financial advice for people with small pension pots, and in particular people who could benefit from an enhanced annuity by shopping around;
- the government and the FSA should clarify the distinction between the provision of information and advice, and the extent to which providers are able to guide potential or existing customers without being deemed to give regulated advice;
- the FSA restores a concern over the quantity of financial advice – as well as quality – to the heart of the RDR process;
- the government establishes mechanisms to ‘join up’ the public policy agendas on financial advice and enabling saving;
- the government continues to promote the open market option in the annuities market, and as such considers how to mitigate the potential impact of RDR changes on people’s ability to shop around for the best annuity deal; and
- the FSA publishes open market option take-up by wealth cohort – providing greater transparency about which people actually exercise their choice to shop around for the best annuity at retirement.
Baroness Sally Greengross, Chief Executive of ILC-UK said “The status quo in financial advice is not sustainable. Trust in financial advice in paramount – and this will only improve with a more transparent charging structure and stronger rules to ensure the independence of advice. But the unintended consequences of the RDR could reduce access to advice for people with small pension pots. We need to a greater emphasis on the quantity of advice as well as the quality of advice.”
Steve Groves, Chief Executive, Partnership added “The key changes brought by the RDR are to be welcomed. A transparent, professional advice market is in everyone’s interest. However they risk creating an“advice apartheid” unless there is greater clarity on what is information rather than advice and the processes to access financial products are simplified.”
- According to the Family Resources Survey 2009/10, barely a third of people are contributing members of a private pension scheme (38 per cent of men and 34 per cent of women). Membership rates are much lower for low-income workers. (Annual Survey of Hours and Earnings 2010)
- By 2017, around 370,000 pension pots valued at £2,000 or less will be created each year. (http://www.dwp.gov.uk/docs/small-pension-pots-consultation.pdf)
- 83 per cent of pension professionals interviewed by Echo in 2011 believe that a lack of ‘access to good quality information and advice’ is the main reason for sub-optical DC pension scheme outcomes for individuals. (http://www.partnership.co.uk/Documents/Retirement/Insight%20Reports/Partnership%20Insight%20Report%20-%20Retirement%20Outcomes%20from%20DC%20Pensions.pdf)
- There are in excess of 1 million small pots in the UK pension system, with around 50,000 small pits created each year (http://www.dwp.gov.uk/docs/small-pension-pots-consultation.pdf)
- A survey of 1,020 advice customers conducted by Core Data Research in early 2012 found that, on average, customers were prepared to pay £38.90 per hour for advice. These figures exclude around one in five customers who would not be prepared to pay for advice at all).www.coredataresearch.co.uk/research/view/consumer-advice-fee-threshold-research/
- The report, Consumer Advice Fee Threshold Research, found that as customers get older, they are less motivated to enlist a financial adviser. Around two-thirds of those surveyed aged 39 or under would hire an adviser, but this drops to around half of those aged 50-64. http://www.coredataresearch.co.uk/research/view/consumer-advice-fee-threshold-research/
- A survey of over 3,000 customers, conducted by KPMG found that only 31 per cent would be prepared to pay for financial advice. Furthermore, of these, 54 per cent would pay no more than £50 for an hour’s advice, and only 1 per cent would pay over £200. Only 22 per cent of those surveyed would be prepared to pay for an in-depth review of their finances, with more than 60 per cent of these not willing to pay more than £250 for this service. http://www.moneymarketing.co.uk/adviser-news/just-31-of-public-say-theyll-pay-for-advice/1019293.article
- It is estimated that 3 in 4 people with ‘enhanced annuities’ choose this product after receiving financial advice. If this link is lost, people with health problems are likely to receive a sub-optimal annuity deal.
- Only 44 per cent of financial advisers would offer advice for pension pots under £50,000 – down from 56 per cent in 2010. http://www.moneymarketing.co.uk/pensions/half-of-advisers-would-shun-small-pension-pots/1040318.article
- 8 per cent of advisers expect to leave the profession in 2012, with a further 7 per cent unsure of their future. 8 per cent of financial advisers left between mid-2010 and mid-2011. http://www.fsa.gov.uk/pubs/other/rdr-professionalism-research-report.pdf
- The open letter has been published at www.ilcuk.org.uk. It has been signed by Dame Anne Begg MP (Chair, Work and Pensions Select Committee), Clive Bolton (At Retirement Director, Aviva), Jonathan Evans MP (Chair, All Party Parliamentary Group on Insurance and Financial Services), Frank Field MP, Baroness Sally Greengross (ILC-UK Chief Executive), Steve Groves (Chief Executive, Partnership), Chris Hannant (Policy Director AIFA), Michael Lake CBE (ILC-UK Chairman & Former Chief Executive of Help the Aged), Lord Lipsey (President, Society of Later Life Advisers), Ivan Martin (Chair, Sesame), Lord John McFall (former Chair, Workplace Retirement Income Commission), Paul McMillan (Editor Money Marketing), Tom McPhail (Hargreaves Lansdown and Pensions Income Choice Association), Lord Newby, (Co-Chair, Liberal Democrat Treasury Parliamentary Party Committee), Joanne Segars (Chief Executive National Association of Pension Funds), Elliot Varnell (Milliman), Keith Boughton (Director, Insurance and Payments, Xafinity Paymaster).
- “The Retail Distribution Review and small pension pots”, by ILC-UK has been published at www.ilcuk.org.uk today.
- The Retail Distribution Review (RDR), will mean that financial advisers will have to charge clients directly for the provision of advice, rather than receive commission from product providers. The RDR also introduces new professional standards for financial advisers. The new regulatory regime will increase the cost of providing advice, which may mean that providing advice at affordable rates becomes prohibitive for many advisers.
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