It is hard to believe but the first quarter of 2012 has been and gone. For me, much of the start of 2012 has been spent discussing with advisers the current pension landscape and the topics that are still likely to unfold this year. Two that spring to mind are the FSA review of income drawdown and the Sipps v platform debate. Let’s look at these in a bit more detail.
The FSA review
When drawdown was introduced in 1995, it was very much a means to an end, deferral of annuity purchase, as opposed to an end in itself, which it now can be.
The FSA will be undertaking a review of drawdown advice and it will not be constrained to the new regime that came into effect in 2011. As part of the review, I am sure the FSA will consider how the fall in annuity rates over the last few years has increased the popularity of drawdown and the impact of removing the requirement to annuitise by age 75.
I understand that the FSA has sent out a questionnaire and some of the information requested will shape the review. The questionnaire will provide information on the number of drawdown cases written, the smallest case size for which drawdown was recommended and the source of the money if it was from an occupational pension scheme (defined benefit or defined contribution).
Examples of unsuitable advice given would include not researching or comparing other alternatives, the lack of ongoing reviews, situations where the investment funds chosen did not match the documented attitude to risk and personal circumstances and cases where the level of income appeared to be unsuitable.
Let’s face it, drawdown is an investment product and with that comes investment risk and for many clients, these risks outweigh the advantages offered by drawdown. The key is the development of an advice process that is robust and repeatable and takes into account the client’s full financial circumstances. Everything must be clearly documented and the risks and advantages explained fully.
Sipps v platforms
Sipps are in for a difficult year. At the end of 2011, the FSA made a couple of announcements which could particularly affect small Sipp operators – the need for comprehensive diligence on investments, particularly unregulated collectives, the possibility of a significant increase in the capital adequacy requirement for Sipp operators and the final FSA response to the disclosure requirements for Sipps.
Sipps win for the more esoteric investments but if the requirement is for a wide selection of collectives, platforms could soon be snapping at their heels. One of the key issues after the RDR is likely to be the need for a robust investment process and this could be where platforms have the upper hand.
Mike Morrison is head of pensions development at Axa Wealth