April’s pension reforms will have a significant impact on the platform market. The functionality offered by platforms will make them the destination of choice for many wishing to exercise the new freedoms, whether that be advised or not. So how will the upcoming changes affect the market and what developments are we likely to see?
While all platforms state they will be fully ready come 6 April, their definitions of such can be radically different. It is one thing to ensure that pension wrappers are able to facilitate flexible access but it is another to implement tools that can articulate the impacts and risks of various decisions. As platforms take contrasting views on how advisers and clients want to make use of the new freedoms, we will likely see some big divergences in terms of offerings.
One big theme we have heard from across the platform market is that it is not all about the pension. Providing income through retirement will be about facilitating a sustainable drip-feed of cash across multiple wrappers in a tax-efficient way. Expect to see some platforms making it easier and quicker to move assets between wrappers, new tools to help with tax planning and managing income, and innovative ways of segregating assets within wrappers to enable different investment strategies for assets with different time horizons.
According to Zurich head of retail platform strategy Alistair Wilson, people will increasingly move into retirement over time, instead of simply just stopping work.
“It is therefore important for people to take income efficiently across their investments. Platforms are well suited to support changes to income needs and can facilitate a number of strategies from different tax wrappers easily,” he says.
“It is also why we believe people need ongoing advice from professional advisers to help them make decisions earlier in their lives, so they are better placed to secure their ideal retirement income.”
Life company platforms are set to be one of the major beneficiaries of the changes, due to large numbers of customers with assets accumulated through the workplace. As wake-up packs are sent out to new retirees, how many will get in touch asking about flexible access? The platform will be the natural destination for clients not wanting to either take the lot as cash or purchase an annuity.
As Standard Life head of platform propositions David Tiller says: “Compulsory annuitisation has suppressed demand for advice in retirement. When a client requires a sustainable income, the management of tax, withdrawal and investment strategies is complex and interlinked. The only way to efficiently manage this is on a platform.”
Life companies have been beefing up call centres to cope with the additional volumes and there will be some online portals popping up. We expect life company-owned platforms to post some solid growth numbers but it will be a busy few months.
One of the big questions at the moment centres on how long it will take to get cash out of a pension and into a client’s bank account. According to our research, 29 per cent of advisers expect withdrawal of cash to take in excess of two weeks and our own conversations with platforms echo this.
Some told us they do not expect advisers to want clients to have instant access to cash. As one platform director puts it: “Advisers will be nervous about ad-hoc client access to cash. They have built their whole [retirement] strategy around management of cash and won’t want to see clients using their pension like a bank account.”
Two weeks is far longer than the instant access pensions ATM card envisaged by some (we can picture the on-screen message when trying to withdraw £60 from a cash machine: “As you are a higher rate taxpayer you will be charged £40 for this transaction. Would you like to proceed?”).
Advice versus execution-only
Elsewhere, what do we expect on the direct-to-consumer side? Drawdown without advice was available before the reforms but there were relatively few takers. In a recent Platforum survey of financial advisers, 79 per cent said that even with powerful tools in place they would not recommend non-advised drawdown (see chart, above).
However, when asked what was the minimum amount of assets on which they could provide drawdown advice, the median answer was £75k (which still feels on the low side given the work involved).
There will be plenty of clients who want to make use of the new flexibilities but cannot afford (or will not be willing to pay for) advice. We would therefore anticipate strong growth in the use of non-advised drawdown. But how will execution-only providers convey the risks and merits of the various options?
According to Hargreaves Lansdown head of pensions research Tom McPhail, the real challenge for the industry lies in making sure customers understand what risks they are taking, how those risks are being controlled and the actions and options open to them to use now and in the future.
Any D2C platform provider will ultimately have to tread the narrow “guidance” path: asking too little information of the client leads to a risk of them buying the wrong product, while too much starts to look like advice. We expect to see nifty tools and calculators on the D2C side but caution initially while they test the regulatory waters. With non-advised drawdown an option, a key question will be around how it is described in the free guidance consultation and whether or not the regulator will implement any limits on who can access it.
Growth in the platform market’s assets under advice should pick up. In the past, client assets had moved off in bulk on retirement but a greater proportion of this will now stay on-platform for longer, providing a boost to growth in the medium term. We should also see more assets moving on-platform that had previously rolled over from workplace schemes into annuities. If successive governments can resist tinkering with the rules too much, the additional flexibility should encourage more retirement saving, also helping to boost the market.
The industry has been working flat-out to get new products and services ready in time for the reforms. This trend is only set to continue throughout 2015 as the dust starts to settle and platforms adapt to the new rules.
Richard Bradley is head of data at The Platforum