Who will advise the new advice seekers?

I firmly believe this new regime of choice and freedom in pensions will only ‘work’ for customers if we have two things. The first is better tax rules allowing innovation in retirement products such as annuities. (And that’s been promised by the Treasury – draft legislation is due out soon.) And the second is impartial guidance to help people understand their options on retirement.

This is the challenge that now faces TPAS and MAS and others. Design an effective guidance guarantee so that people understand their options and what they can do to provide themselves with an income for the rest of their life.

The accepted wisdom doing the rounds at the moment is that the guidance will explain people’s options to them. And it will hopefully spur a number (as yet unspecified) to seek professional advice to figure out which of these options is best.

I have no doubt that this supposition is right. Some people will seek advice. But what I am curious about is who will advise these new advice seekers?

The FCA has mooted the idea that as advisers will benefit from this new source of customers they should pay some of the guidance costs. But one adviser’s reaction on seeing the potential FCA advisers’ bill for 30% was (and I paraphrase) “why do I have to pay? I don’t want these clients anyway!”. And I think that probably rings true for a number of professional advisers. Sure, there will be some ‘value’ cases that professional advisers will be happy to add to their books. But some of these potential customers will have assets that fall below some advisers’ target markets. And although these new customers may be willing to pay – and see the value in paying - for advice they may not be able to afford quite that much.

So, what will happen to them?

This is a genuine question – I would like to know your thoughts.

Am I wrong? Will all these new advice seekers get swallowed up by the professional adviser market? Is there enough capacity and appetite out there?

Will professional advisers develop some sort of new proposition to be able to ‘service’ them in more cost-effective ways? And can they do that under the current FCA rules?

Is there a role for simplified advice as it stands? Or does it not make economical sense? (If you are employing a professional adviser, then is it just more sensible to let them offer a full advise service? After all, that’s what they are trained to do.)

Or do we need a new solution? I would hate it if we created a new breed of customer who actively sought professional advice but was unable to access it. Even if it was just a handful of people.

Answers on a postcard please ....

What to look out for next week

It’s fast approaching the time when Parliament breaks up for the summer. But before it does, the Treasury has an important job to do. If it wants to get the new pensions freedoms and guidance (proposed in the Budget) in place by April next year then it needs to get its skates on and get the legislation sorted. Time is of the essence.

The first step is Treasury issuing a response to the Budget consultation (which closed in June) before Parliament packs up and go on holiday. In other words, by next week.

This is important stuff. The new proposals are far-reaching, explosive, liberating, and exciting. But they are potentially dangerous for people. It’s great that we are introducing them, but it’s imperative we get the context right. Or else, things could get messy.

Right legislation will lead to new product development creating the right solutions for people. And the right guidance means people can make the most of what’s on offer. My worry is that under the new regime instead of people failing to shop around for an annuity, they fail to shop around for drawdown (or whatever product). If we end up with 50% of people simply rolling over into their current provider’s drawdown fund, then we have failed.

So what am I looking out next week from the Government’s response? Three things.

1.       Flexible legislation. Ideally, the whole legislation underpinning ‘retirement products’ could do with a good sort out and a re-write. But the Treasury hasn’t got the luxury of time. But I do want to see legislation that is flexible enough to allow innovative and useful product development. For example, let annuities go down in value, if that means we can design products that fit the way people want to take income.

2.       Impartial and effective guidance. Getting the guidance right is tricky. Getting the guidance right in the ten months they gave themselves is near enough impossible. So although the right foundations have to be laid now, the guidance has to keep evolving and changing until it’s right. It needs to be impartial, and that means asking someone like TPAS or MAS to take it forward. It needs to be there when people want it – not just a one-off. And it needs to involve the adviser community – at the very least handing over to them whenever appropriate.

3.       Sensible response to tax leakage. Once the pension freedom genie was out of the bottle, the big question on everyone’s lips was how will the Treasury stop the double dipping? The ability to invest big amounts of money (because £40,000 is still a big amount of money) tax-free, and then let people take 25% of that tax-free. The answer could be convoluted and difficult. But I am really hoping that the Treasury decides to be sensible about this. A separate annual allowance for once benefits have been taken (of say £10,000)is simple to explain, simple to administer and simple to understand. It is better to have ‘sanctioned tax leakage’ of a small amount rather than build a complicated convoluted workaround that no-one can understand, no-one can illustrate and is difficult to administer.

So that’s it. The Budget proposals were radical, and hopefully, the Treasury will get the next steps right. And it gives us the summer break to absorb all the glorious detail of the proposals whilst the Treasury is hard at work drafting legislation.