I have often thought I was a lone voice talking about the so-called advice gap, so I was pleased to hear Royal London group chief executive Phil Loney speaking about the same thing. He was quoted recently in the press as saying he fears people will make wrong and often irrecoverable decisions about their retirement because of a lack of affordable advice, leaving them with an inadequate income to live on.
He added: “A high priority on the to-do list of the next Chancellor and pensions minister must be to address the advice vacuum for middle market savers, with clear direction given to the regulator.”
So what is this advice gap? There is a group of people who have pensions too big to just take a cash sum and risk paying too much tax, but not big enough to justify bespoke investment management for a drawdown policy and in-depth financial planning.
In the past, it was easy to argue that small pensions purchased annuities and bigger funds went into drawdown but the new freedoms have democratised retirement options. This means it could be appropriate for those with relatively modest funds to consider drawdown and one of the challenges will be how to advise these people. Some may argue that people can invest in drawdown without advice but the issues are far too complex for most people to understand properly.
There are many reasons why the advice gap has arisen. It is easy to blame the RDR but there were signs of an emerging gap long before then. A combination of behavioural and regulatory changes has resulted in the perception that advice is complex and expensive.
One problem is the word “advice” itself. The dictionary defines it as “guidance or recommendations concerning prudent future action typically given by someone regarded as knowledgeable or authoritative”. No wonder Paul Lewis felt the need to write “Advisers do not own ‘advice’ label” in Money Marketing recently.
There are a number of ways to fill the gap, including simplifying advice models, but the industry seems to be tied up in knots over terminology.
The answer lies not in dumbing down advice but making the whole process more customer friendly and cost efficient. It should be possible to take out some of the cost and complexity without compromising on professionalism and the responsibilities involved in making suitable recommendations.
I can think of no other situation where there would not be national outcry if the Government sat back and watched as millions of people sleepwalked into a potentially disastrous situation.
“It may get worse before it gets better” was a phrase I used a lot in 2012 when commenting on falling annuity rates. Who would have thought I would be reusing it three years later? In the autumn of 2012, the benchmark 15-year gilt yield fell to 2.12 per cent, the lowest level since records began. That ushered in eight months of the lowest annuity rates ever seen. The income from the £100,000 benchmark annuity (joint life 2/3 partner’s pension, ages 65 and 60, with level payments) fell to a low of £4,836 in March 2013. Fast-forward to this month and the benchmark gilt has fallen to 1.76 per cent, with the benchmark annuity rate at £ 4,591 – another record low. With the risk of deflation in the UK and continued tension overseas, it does not seem like interest rates and yields will rise above current levels in the near future. Although less people will purchase annuities now they have more freedom over their options, they will remain the benchmark by which all retirement income options will be judged. It matters that annuity rates are low because many people prefer the lifetime income guarantee rather than the risk of drawdown. Locking into such low rates will be painful.
Billy Burrows is associate director at Key Retirement Solutions and director at Retirement Intelligence