Providers are responding to growing demand from savers for drawdown pension products, but there are fears those who bypass advice could be left exposed.
The Budget has opened up the pensions market at a stroke, turning the tables on annuities as the dominant retirement product and boosting the profile of income drawdown.
Prior to the Chancellor’s Budget statement, pension companies shied away from offering drawdown direct to consumers. The risk of members reacting badly to investment falls or spending cash too quickly without the support of an adviser was deemed too great. Since then more providers have begun to dip their toes into the drawdown market.
The Organisation for Economic Co-operation and Development warned this week the reforms risk consumer detriment. It comes at a time when the restrictions on drawdown have already been partially dismantled, with flexible drawdown now open to anyone with £12,000 of guaranteed income while capped drawdown withdrawals have increased to 150 per cent of the GAD rate before both aspects are removed completely from April.
So could providers’ willingness to serve the new market simply lead to poor customer outcomes?
Last week Royal London said it plans to offer a new non-advised drawdown contract to meet demand. However, the mutual insurer says only “insistent” customers will be given access to drawdown, and even then there will be restrictions on the investments available.
Standard Life is also planning to limit the range of investments open to its non-advised customers, Money Marketing can reveal.
Standard Life head of workplace strategy Jamie Jenkins does not think the industry should be imposing obligatory advice but argues savers entering drawdown without an adviser do need protection.
He says: “We offer non-advised drawdown but, in future, the options available will be restricted to ensure that people don’t stray into more esoteric investment choices without taking advice.
“The new market will be much more about flexible access rather than drawdown, so we need to consider how we make options accessible without introducing additional risk. If there was no non-advised route, then the industry would in essence be mandating advice to access the new freedoms, which doesn’t seem proportionate.”
M Thurlow & Co senior partner Blair Cann says firms’ precaution of restricting savers to less risky investments will still leave customers exposed.
He says: “It doesn’t change my view that to invite people to take drawdown without having taken advice just seems ludicrous. I can’t see how morally it can be justified with providers just shrugging their shoulders. Some of the technicalities of drawdown may not be immediately perceived by the man on the street. Yes, they will have to pay for advice but they will save money in the long run.”
Old Mutual Wealth will accept non-advised drawdown only in “exceptional cases”, for instance if the customer has got financial planning qualifications or works in retail finance, but has no plans for a non-advised drawdown proposition.
A spokesman says: “We believe drawdown is a particularly complex area where individuals should ideally take advice. This is primarily because of the longevity risk associated with drawdown.”
Aegon has combined drawdown and unit-linked guarantees on its platforms but has not yet launched a non-advised product. Aegon chief marketing officer David Macmillan says: “The flexibility we believe has to be there will undoubtedly throw up complex choices that we as providers have to ensure clients can handle, so right across the industry everyone is exploring that challenge”.
MGM Advantage made its first step into the drawdown market in November, launching its advised-only Retirement Account, a platform allowing flexible access as well as guaranteed income.
MGM pensions technical director Andrew Tully says it is “not impossible” the firm would launch a non-advised product in the future but that it’s “not the focus at the moment”.
He says: “The market is complex and from April it’s more complex than ever. Our belief is advice is key to getting good customers outcomes.”
He says the nature of drawdown makes it a particularly complicated area because, unlike when building up pension savings, savers are taking income at the same time as poor investment returns could be rapidly depleting their pots.
Legal & General’s mastertrust has redesigned the scheme’s investment strategy as a result of the Budget. Savers who want to go into drawdown will be moved from the default fund to the new Retirement Income Multi-Asset fund within three years of accessing their pot. A spokesman confirmed this is a non-advised process which is currently only available through the mastertrust.
LV= does not offer non-advised drawdown, although its non-advised fixed-term annuity is technically a drawdown product. But the provider is exploring an “advice light” proposition, with mandatory adviser reviews.
LV= Retirement Solutions head of distribution Steve Lewis says: “We think there’s an opportunity for a new relationship between advisers and product providers, particularly in this arena.
“With the right processes in place we’d be comfortable with a non-advised entry point but married with an advised review process. Where there’s clear investment risk we think it’s very important clients have a trapdoor into advice if they need it.”
Hargreaves Lansdown has offered non-advised drawdown for years.
Head of pensions research Tom McPhail says: “If pension schemes and providers want to offer customers retirement income solutions, they’re going to offer drawdown.”
But he says some may not develop their own drawdown products but rather integrate existing third-party solutions.
McPhail adds providers have been held back while they wait for the FCA to give clarity around how it will regulate the post-Budget market.
He says: “The FCA is very keen to see some kind of development in the middle ground of some kind of simplified advice proposition. There’s certainly regulatory momentum in that direction but the market has been somewhat hesitant to go down that road because of the regulatory risk posed – they want certainty and clarity over the regulatory boundaries.”
In November, the regulator said it would be scrutinising non-advised annuity sales following industry concerns around these products and the new pension withdrawal option, uncrystallised funds pension lump sums.
The Labour party has also expressed an interest in the regulation of the drawdown market. The Labour-commissioned Independent Review of Retirement Income has asked whether a charge cap should be applied to drawdown funds as part of a recent consultation.
Drawdown sales surged 68 per cent in Q3, according to the Association of British Insurers. When the remaining barriers to entry are removed in April, and those deferring making a decision on their pension take action, demand is sure to increase again. Those providers currently resisting non-advised sales may find the pressure of losing business to their more willing rivals quickly leads to a change of heart.
EXPERT VIEW: Alan Higham
The decision to stay invested while drawing income in retirement rather than purchasing an annuity is one of the most complex financial decisions people have to make. I was in a public meeting in 2011 when a former FSA pension policy chief was asked whether income drawdown could be sold safely without advice; “No” was his reply.
Consequently, many providers prefer or even require their customers wishing to stay invested to have been advised to do so.
Following the new pension freedoms, going into income drawdown can cover anything from taking a little bit of cash whilst deferring the main retirement decision to wanting to cash in the whole pension over a short period.
Should Mrs Smith have to pay for advice to access £2,000 of her £20,000 pension fund? It may be beneficial to have advice but it is hard to justify forcing her to.
At Fidelity, we believe most people would benefit from taking retirement advice but we do not require them to do so. We do though believe in not standing by and watching our customers make decisions they could suffer from. Yes, we profit short-term if a customer stays invested longer but no-one really benefits in the long run if the customer ends up with insufficient money to live on. We therefore provide proactive guidance to people wishing to go into income drawdown.
Even experienced, self-directed investors who have built up substantial pension pots benefit from this. Some decide to seek advice as a result, while others are happy to proceed without it, perhaps modifying their approach as a result.
Given the amounts at stake and the irrevocable nature of the decision, transferring a defined benefit pension is one area that we do insist on advice being taken before accepting business. We do not wish to profit at our customers’ expense.
Alan Higham is retirement director at Fidelity Worldwide Investment