With constant changes in the regulatory sphere, advisers will be trying to get to grips with what impacts them and what is just noise.
When it comes to the FCA’s investment pathways we know advisers will need to consider them when assessing suitability. However, there is a wider impact to this regulation that advisers also need to be cognisant of.
In February, there will be a fundamental change when a customer contacts their pension provider to access drawdown (or instruct a drawdown transfer).
The existence of an ongoing adviser charge on the pension will not exclude the client from the new regulations; a pension provider will be required to offer investment pathways and take clients through a choice architecture to select investments if no personal recommendation has been provided.
The advice profession should, therefore, be sitting up and taking note.
In recent years we have seen an increase in clients going directly to their pension provider in order to make withdrawals from their pension, rather than facilitate it through their financial adviser.
There are a number of reasons they would do this. Perhaps it is a small sum of money that they don’t want to bother their adviser about, they may need it quickly and the client or adviser fear a middleman will only slow the process, or they may have gotten more familiar with what they can do with their pension themselves under pension freedoms.
This action itself is not particularly concerning, albeit there can be circumstances and challenges to the adviser/client relationship if the adviser is unaware of the impact or deems it a material shift away from long term plans.
However, investment pathways will fundamentally alter the client journey into drawdown if they come to the pension provider directly. If a customer has not had a personal recommendation in respect of the action to designate funds to drawdown (or drawdown transfer), the provider must present the customer’s investment options for their drawdown fund using a specific choice architecture, that will include investment pathways, to stay in their existing investments or select new investments.
The process can be is reasonably lengthy as among other things a customer needs to understand how the sustainability of their drawdown fund is affected by the proposed withdrawals, tax and other risks. Customers will also have to assess whether the investment pathway solutions match their attitude and capacity for risk.
We need to talk about drawdown
Moving forward there is concern about how the economic outlook next year may start to alter behaviour.
Data in recent weeks has pointed out the economic predicament facing the country and what it might mean for individuals. Specifically, the OBR has forecasted unemployment to surge to 2.6m people by the middle of next year which, at 7.5%, will be the highest rate since the financial crisis.
This economic shockwave is beginning to be felt by consumers. You need to look no further than recent pension withdrawal data to see that concerns are creeping in, and ultimately could spiral as further shocks are felt by households down the line. Figures from the ABI showed an increasing number of pensions savers have started to withdraw funds after many pressed pause at the start of the pandemic.
While this is not necessarily a startling revelation as many were clearly spooked by falling markets, when coupled with latest HMRC data that highlighted pension withdrawal figures bucking the usual seasonal trend, the picture begins to become more of a cause for concern.
As the economic backdrop becomes more uncertain, people can raid their pension pots to shore up any loss of income or cashflow issues. With unemployment due to spike in the early part of next year, we fully expect this behaviour to be on the rise once again.
Unemployment and financial difficulties are difficult subjects to broach and clients may just want to deal with this by themselves. But this is ultimately the most important time to keep that adviser/client relationship strong and prevent any possible negative outcomes if they do choose to withdraw money from their pensions themselves.
Clearly, pathways are here to stay, and advisers will have to recognise them when assessing suitability. But advisers also have plenty of tools in the box to highlight the value they can add to a client while ensuring all the options are properly understood so that non-advised withdrawals don’t become a systemic issue during a time of economic crisis.
It is more important than ever to keep the conversations going with clients in times of uncertainty. If not, then pension freedoms are arguably in danger of providing poor outcomes if clients don’t understand fully the consequences of their decisions.
Jon Greer is head of retirement policy at Quilter