There are 41 million people of working age in the UK. Thanks to auto-enrolment 15 million of these are now pension savers – a growth of nearly 10 million over the last few years. Fortunately, the vast majority of these do not need advisers as their savings are small and the majority are invested in default funds.
However, as their savings increase and they approach retirement their need for advice will grow. For how long will the default fund remain appropriate to their objectives? How will they move into retirement – via a cliff edge or gradual transition? How will they use their accumulated pension savings in retirement to provide them with retirement income?
Although we now have a large number of savers, are they saving enough for retirement? The answer depends upon at what age they begin to retire, how they move into retirement and what their retirement lifestyle will be. However the general consensus is they are not saving enough.
Even if they were saving enough, are there sufficient financial advisers to help them? Latest data shows there are 26,000 financial advisers. If each adviser serves 200 clients, the capacity of the adviser market is about half a million clients.
Each year around 600,000 to 700,000 people reach retirement age. If we assume that they need retirement income advice to cover the 15 years over the period from when they first think about retirement until they are well into retirement, that’s around 10 million people needing advisers.
Very crudely, that means as a result of auto-enrolment, pension freedoms, movement of State Pension age and the abolition of the default retirement age, we may – in the next few years – need close to a 20-fold increase in the number of financial advisers.
Robo advice and other factors should increase the productivity of advisers and that may help reduce this growth in demand. However, this brings us back to whether enough is being saved for retirement. Before all the recent changes affecting retirement, around 400,000 annuities were bought and 40,000 went into drawdown each year. This meant that around 40,000 a year needed continued support from an adviser in retirement.
According to the latest FCA data bulletin, annuity sales are now running at around 68,000 a year. Income drawdown sales are 181,000 a year, (202,000 if you include a first partial Uncrystallised Funds Lump Sum Payment). This means that since pension freedoms were introduced in 2015 there has been close to a five-fold increase in new customers needing income and investment advice in retirement.
It’s quite right that some may not use an adviser but I would argue that there are very few who are qualified to manage income drawdown without the aid of an adviser. I have excluded from the above numbers who have taken tax-free cash but are not drawing income from their pensions.
There is another angle to the advice and support those approaching retirement need. Many are reaching retirement with insufficient pension savings to fund their retirement. Although there is a great army of new pension savers, most of them will reach retirement in a similar position. Will they adapt their retirement to their pension income or will they be looking to use other wealth to supplement their pension savings. This then means different advice will be required, seeing that wealth will often consist of housing wealth.
We will also see an increase in the numbers of those who currently do not have any other wealth but now have pension savings. If they draw these down too fast they could find when they run out of money the authorities apply the deliberate deprivation rules to any benefit claims they make. On the other hand what is the amount they can draw down and pay the minimum tax in the most efficient alignment with their benefit entitlement?
We are only at the beginning of what should be a seismic increase in demand for retirement income advice. The big question is just how prepared the market is for it?
Bob Champion is chairman of the Later Life Academy (LLA)