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Kim North: Advice vital to prevent pensioner poverty

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This year we celebrate 30 years of Money Marketing and I have been contemplating what has been the most defining moment in financial services over that time. Of course, there have been world-changing events, such as the bankruptcy and subsequent collapse of Lehman Brothers in 2008.

Indeed, the largest bankruptcy filing in US history made markets shake like never before. There  has also been legislation, such as the Financial Services Act of 1986, which laid the foundation of liberalisation and consolidation of the industry.

But even though the above are events that will always be quoted in history, my mind keeps coming back to the outcomes of the RDR.

While not in itself the biggest, most significant event of the last 30 years, it has inadvertently led to thousands of lines of press comment about poor consumer outcomes and people believing they cannot afford financial advice.

Citizens Advice announced this month that almost half of the adult population – more than 23 million people – would have taken financial advice at key moments of their lives if they had been offered it.

In December 2012, the first month in the brave new RDR world, the number of IFAs and tied advisers was 20 per cent down on December 2011 figures. The number of bank advisers had fallen 44 per cent. These numbers may now be increasing again thanks to the fact the demand on examination halls has subsided but the demand for financial advice is higher than ever before.

Chancellor George Osborne’s unexpected announcement on pension freedoms could well result in unintended consequences, with Royal London reporting 69 per cent of its pension clients have taken their entire pension fund as a cash lump sum since April. One Fidelity client even took the cash and bought a Routemaster bus.

In order to ensure pension freedoms are more efficiently offered, the FCA is consulting on many matters, including how providers can give consumers information on the sustainability of their income.

Over the years, I have been to many conferences with speakers glowingly sharing the Australian pension “success” story.

However, today, one-third of older Australians are living below the poverty line. There are lessons that should be learnt from the country.

Indeed, in the UK, one in six pensioners are living in poverty. It is crucial we ensure this figure does not get any worse and, as such, we need to make it easier for the 23 million people that have not received financial advice to be able to do so.

Whatever the outcome of the many FCA papers on financial advice and pension freedoms, half of the population desperately needs the banks and building societies to offer client-specific financial advice alongside an improved Pension Wise.

And they need to do this before thousands more people cash in their entire pension and spend it all on a passion.

Kim North is managing director at Technology and Technical

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. One of the reasons why people might be taking their entire pension pot at retirement is to invest their money into something better than an annuity. Annuities have for some time offered very poor returns. Not only has the Uk Pensions Industry provided poor Investment returns over the staggeringly long period people are forced to have their money with pension companies, when they get to retirement they are offered a peanut pension from a peanut pot of money.George Osbourne has found the perfect way for the Pensions Industry to clean up its act. Hopefully he will soon go further and give real choice on how to fund for retirement. The irony of the UK Pensions Industry is that the only people who end up with a fat cat pension are senior employees of pension companies. The guy buying a bus. Don’t knock it yet. He might get a very good return from this investment by hiring it out. What’s the current yield on an annuity!

  2. The reasons for pensioner poverty are numerous, examples being:-

    1. People living for today and blanking out thoughts of tomorrow, not helped by the lack of controls over unsecured credit.

    2. Personal economics not being part of the national education curriculum.

    3. Lack of spare funds to set aside because many of society’s less well off can afford only to live from one month’s end to the next. How can such people be advised on what they haven’t got?

    4. Lack of confidence in the pensions system because the government just cannot stop endlessly tinkering and meddling with it.

    5. Legacy issues from the past such as high charging contracts with poorly performing funds and punitive exit terms.

    6. The high costs of advice caused by excessive regulation and the claim-for-gain culture constantly being stoked by unscrupulous CMC’s (hence suitability reports get longer and longer).

    7. Poor annuity rates ~ but that’s not the fault of annuity providers, they can only make the best of what’s available to them and a few are doing their best with enhanced ill-health annuities.

    8. The complexity of all the rules in which pensions are mired (see 4 above). What people don’t understand they naturally fear. And, if advice on what they don’t understand is expensive, people are even less inclined to pay for it.

    And there are more. There is no magic fix for this problem, certainly not throwing boatloads of money at it. Some measures to address it though might be:-

    1. Restrict unsecured borrowing to 3 months net income.

    2. Add personal economics to the national education curriculum.

    3. Stop endlessly tinkering and meddling with the pensions framework.

    4. Introduce a streamlined/simplified and therefore lower cost advice framework.

    5. Reduce the burdens of excessive regulation (thus facilitating lower advice costs and shorter suitability reports).

    6. Remove providers’ ability to impose discretionary punitive exit charges from old legacy contracts (which might have been achieved had the FCA not bungled its proposed closed book review).

    At least such initiatives would be a start ~ wouldn’t they?

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