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The need for knowledge

In today’s age of technology, there is a vast amount of information available to clients on the worldwide web. If the general consumer needs to get information on any financial product or service, they can do so at the touch of a button.

This has in turn meant that access to financial products and information has expanded at a rapid pace, giving investors the opportunity to lay their hands on a wealth of information as well as enabling them to buy the majority of products online.

For rate-driven products or for those investors who are sophisticated and knowledgeable, the latest online functions on offer have considerably widened the scope.

These consumers are able to deal directly with the product providers without necessarily needing to seek out financial advice and, where advisers are involved, many providers now provide online functionality that complements both the initial and ongoing advice process, enhancing the overall customer experience.

This is especially the case in the pension market, where product and investment fund information is readily available along with an array of modelling tools, access to up to date fund values plus the ability to perform various tasks online such as fund switching. All are designed to assist both the consumer and the adviser.

But what about the scope for online functions when people approach retirement?

Many more people are now approaching retirement with money-purchase funds, as opposed to being in final-salary pension schemes, where little or no decisions are required on the part of the individual. This has meant that most have been left to their own devices to consider and assess the many options now available when converting their pensions fund to income at retirement.

For a typical retiree in the UK with an average pension fund of around 25,000, the options at retirement continue to be limited. There is very little choice other than to purchase a conventional annuity to secure a guaranteed income. It is this type of rate-driven transaction that lends itself well to the annuity supermarket approach now offered by specialist IFAs. However, this is something that should still be approached with caution to ensure that valuable guaranteed annuity rate options are not given up or the possibility of obtaining enhanced rates, for example, smoker’s annuity rates or impaired life rates, are not overlooked.

It is safe to say that being able to get information on certain products and options online has opened up new channels and has been good news for the pension industry as a whole. But the question still remains – do the majority of people then have the financial knowledge to go on to purchase sophisticated products via the internet?

More product innovation relating to annuities, draw-down or the alternatively secured pension (ASP) in 2006 will lead to more choice for the client, which is a favourable trend.

The most exciting area for innovation seems to be under income drawdown and ASP. On top of the increased investment and income flexibility post- A-Day, there is the potential to continue drawdown after the age of 75 using ASP and eventually leave the fund to the spouse and then other family members who have also joined the same pension scheme.

New regulations that will come into force on A-Day, April 6, 2006, certainly make the likes of income drawdown and Sipp contracts more attractive to the client as they can mean increased income and investment flexibility and providers and advisers alike are positioning themselves now to capitalise on this expanding market.

Along with all the changes, there are some complex issues that all clients will be required to address as they go ahead and invest in an income drawdown product, not only at the outset but continuously throughout their retirement. The assistance of a suitable qualified financial adviser is a must for even the most knowledgeable client. For the adviser, these are challenging times and there are several issues to be faced:

o Assessment of the numerous products and product providers ranging from personal pension income drawdown to an array of Sipp drawdown products.

o Variance in cost. The market offers the usual cheap and cheerful mono-charged products as well as the more expensive Sipp and discretionary invested contracts, with set-up charges, annual administration charges and annual management fees. Product cost and options need to be weighed up and aligned to client requirements.

o Initial and ongoing investment advice. An increase in life expectancy and the progression to ASP from the age of 75 post- A-Day means that clients could potentially be looking at having their funds invested for 30 years or more. Now, more than ever, there is a need for clients to set a suitable investment strategy which can be managed and adapted over time. There is also a need for risk profile modelling linking a client’s attitude to risk to a bespoke asset allocation as well as a requirement for clients to undergo annual reviews in order to assess the performance of their investment alongside any changes in their personal circumstances.

o Wide choice of investment mediums, including in-house, external fund managers, manager of managers, multi-managers and discretionary fund management through to direct investment in stocks and shares and, of course, property.

o Accessibility to tax-free cash. After April 6, 2006, clients will be able to take tax-free cash and zero income from their designated unsecured pension fund. Clients and advisers alike will need to balance the need to get hold of tax-free cash and having enough pension for retirement.

E-commerce is working to educate the public and to give them more information on financial products and options available to them. This is particularly the case in the pension market.

The problems arise when clients think that they are fully equipped to purchase a pension product when in reality there are certain things that only a fully qualified adviser would be able to pick up on.

Not giving themselves access to all available information, whether over the internet or from a financial adviser, could lead to being a costly mistake for any client.

All in all, the internet, along with changes in the pension market and the impending A-Day, has provided clients with more choice and increased flexibility.

But this, along with the complexity of the income drawdown market, only stands to provide a higher requirement for seeking sound independent financial advice, as opposed to moving into a market, which is heavily based on self-selection online.

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