When it comes to retirement planning there’s a lot of knowledge around, and even more ignorance. The pensions world is curiously split in this regard. The private wealth market, predictably, says that professional advice is what people need. Much of the workplace market by contrast, seems to think that education and guidance is enough. Can they both be right? It’s unlikely.
Could it be that the workplace pensions industry is letting people down at the most crucial point in the lifecycle of our retirement planning? Data from the ONS tell us that people are drawing from their pension pots too soon, too heavily, encashing too readily and making fragmented decisions. Our research shows that the large workplace pension schemes lose the majority of member assets at the point they come to draw an income – sometimes as much as 70 per cent. Where are those assets going? A mixture of early encashment, or for those that can afford it, to products intermediated through an adviser.
So where does that leave workplace schemes? One thing’s for sure, you can’t create good outcomes for your members if you don’t hold their money.
So why aren’t members keeping their money in workplace products? The complexity of decision-making at the point people want to draw an income is just too overwhelming for most. We’ve tried education. We’ve tried guidance. The result is that people are still moving their money away, and we know this is leading to poor outcomes. Mercer analysis suggests that members are very reticent about moving funds into on-platform drawdown products without advice. Guidance is not delivering as we wished it would. We need to do better.
So what questions and decisions do people face when it comes to drawing an income? Should I consolidate? Do I pay transfer penalties? What is an annuity? What is a flexible access drawdown? Where should I invest? How do I figure out my attitude to risk? How much money will I need? What if my income needs change? What other income products do I need? How do I take account of our other financial assets and what part do they play in my post-work goals? How do I make sure I don’t pay too much tax? What represents a reasonable charge? What are safeguarded benefits? What is with profits and what is a terminal bonus? What happens when I die? What is UFPLS? And so on. You get the general idea. No wonder education and guidance is found wanting. When it comes to really important decisions and actions, you want people alongside you who know what they’re doing.
What’s the answer? The answer is professional advice. And advice not just limited to the one product, but holistic advice. Traditional advice models of course are limited in reach and they can be expensive. So we need to challenge the existing model.
The good news is that new options do exist. They are still, as yet, largely fresh from the test centre but someone needs to make the first move.
Mercer has partnered with HUB Financial Solutions to bring a digital retirement advice service to our master trust members The service offers fully-regulated financial planning advice. This advice encompasses all the member’s assets and liabilities, together with those of their partner. Because the interaction is built online, and because we are able to use sophisticated algorithmic modelling to dispense the advice, we can remove the biggest barrier to entry – namely cost. Members can use the tool to explore and model at their own pace, at no cost and, when they are ready, the initial fee to set-up their income is in the low £100s. We then continue to support them for as long as they want us to manage their retirement income. And throughout, the digital journey is supported by human beings on the end of a phone or a webchat.
It’s new and it’s at the vanguard of the market. There will naturally be teething issues. But there is a sense of inevitability in the breeze. Traditional financial advice will always have a place, but it has never and will never be able to serve large populations. And more and more, people are going to need advice to help them navigate the complexity that a DC retirement ushers in. Now that we have the technology to provide full fat, holistic retirement advice online, it seems inconceivable that this will not become the dominant method of retirement support for the majority of people in time.
Let’s face it, how many of us still go to a high street broker to renew our home insurance?