It is sometimes all too easy to forget that pensions are about income throughout retirement, especially when members are having huge capital sums dangled under their noses like juicy carrots.
In final salary land, the current excitement over defined benefit transfers is driven by the enticing sums on offer. It is not surprising 80,000 people took the leap last year, with capital sums averaging 25 to 30 times the annual pension on offer.
And over in defined contribution land, the pension freedoms have brought a new focus to the pot size at retirement. Again, presented with the option of a large sum of cash, many are simply taking it.
But while the Treasury is enjoying the unexpected bonus of £1.6bn per annum tax receipts from people cashing in, it is encouraging to see the FCA trying to get the focus back on income.
The recent consultation on pension transfer analysis is very income focused. This should move forward quickly now with a Policy Statement, then new rules in 2018.
Going forward, advisers will need to start by looking at the client’s income needs, which may mean ignoring their objectives if those are short-term cash or better death benefits. And quite right, too; the pension is supposed to be all about retirement income.
Once the client’s income needs are established, and we know how they are going to be met, then we can move to other aspirations like buying that retirement caravan.
The FCA is also trying to help customers focus on income with the ideas it aired in its retirement outcomes review.
I like the idea of a default investment option for income drawdown. It removes one of the major obstacles for non-advised customers buying this retirement product; having to make an investment choice they know they are ill-equipped to determine.
The idea of an income drawdown comparison tool has merit too. I do fear it may be too heavily weighted to expense comparisons because regulators set great store by this, but if it helps people feel confident they have made a good choice with their scheme, then it can address the current level of consumer mistrust in pensions the FCA has identified.
Most interesting of all the ideas the regulator has floated is the concept of de-coupling tax-free cash from the retirement income decision. In the month Richard Thaler has been awarded the Nobel Prize for his work on behavioural economics, we should praise the FCA for its own understanding of the behavioural aspects of retirement.
In many cases, people are motivated by their tax-free cash and will choose the retirement income solution that gets them the quickest access to that money. The ill effects of a hasty decision can be avoided by de-coupling the access to 25 per cent tax-free cash from the decision about the other 75 per cent.
The FCA has also reiterated its call for innovation in the retirement income space. The pension freedoms were supposed to not only liberate consumers but also free up providers to create a new range of innovative retirement income products to meet today’s needs and modern ways of managing money like platforms. Providers, please bring them on.
Adrian Boulding is director of retirement at Tisa