Advisers have backed a warning from the Consumer Panel on the risks of non-advised drawdown sales, claiming they are an “absolute nightmare” without advice.
Speaking at the Taxation of Pensions Bill committee hearing last week, Consumer Panel member Teresa Fritz said the prospect of growth in non-advised drawdown in the wake of the Chancellor’s Budget reforms was a major worry.
Pension providers have already raised concerns about the prospect of savers entering complex drawdown contracts without taking advice. Earlier this year, the FSCP published an influential report highlighting an increase in problems from the use of online non-advised annuity sales.
Fritz said the issue of non-advised sales is even more urgent with drawdown and could see customers sold inappropriate products.
She said: “The big area of concern is the growth in non-advised streams. It was worrying enough with just annuities but is more worrying with complex products like income drawdown.
“For regulated IFAs it should be business as usual – they will just have more customers.
“If people have gone down the route of non-advised, a lot of consumers don’t understand they have gone down a route without protected regulated advice. Execution-only services can look very much like advice. That is the big difference – you don’t have that redress to the Financial Ombudsman Service.”
Advisers echo these concerns and suggest advice should be widespread for anyone taking drawdown in order to properly manage risk.
Worldwide Financial Planning IFA Nick McBreen says: “Non-advised drawdown is an absolute nightmare. If people are entering drawdown then they are entering a complicated solution and that needs careful planning and advice.
“If they don’t take advice, it is likely they will make the wrong decision as they don’t know anything about it.
We have had years of people taking the wrong annuity option if they stay with the provider and we will have the same thing with drawdown.
“Unless you are an expert investor with a huge amount of experience, it should be fully advised. Otherwise people will make a complete pig’s ear of it.”
FortyTwo Financial Planning director Alan Dick says: “If you go it alone and you make a bad decision then tough, but if you go to an adviser and he gives you bad advice, then at least you have somewhere to go back.
“It is a sounding board and someone to question and think through the decision. Advice has a massive role to play in drawdown and it is very questionable whether anyone should enter drawdown without it.”
When the Consumer Panel raised concerns about non-advised income drawdown, I was interested to hear their thoughts. To say I am concerned is an understatement. I have always held the view that some “DIY” investors have done a very good job managing their pension pot.
But the non-advised world is different. At the end of the day it is a product sale, often to financially inexperienced people, many of whom believe they are actually getting advice.
We all know one of the main risks posed by income drawdown, post-April 2015, will be that too much money is taken out too soon, leaving the hard-up pensioner struggling to make ends meet later in retirement.
If a pensioner chooses the non-advised route, who is there to help them manage this risk? Who will advise them on setting a sensible level of income?
Who will monitor the investment performance to ensure income levels are sustainable?
The cynic in me can already see non-advised brokers rubbing their hands with glee. Not only have they found a way of replacing the turnover they have lost from falling annuity sales but they will no doubt find a way of charging an annual fee for this; recurring income without the headache of giving advice.
High-quality, fee-based, independent advice is crucial at retirement. I fear unless we are careful, non-advised brokers will encroach onto the IFA’s natural territory, leaving a trail of unfortunate investors in their wake.
Phillip Bray is marketing and relationship manager at Investment Sense