The initial recommendations are set to be announced next week in the chancellor’s Budget and we hope to see government taking bold action that will genuinely benefit consumers.
The problem is complex, but at its heart people are not saving enough for their retirement and are losing out by not seeking advice to secure the best solutions when they do retire. Retirement saving has been boosted partly by auto-enrolment and the government’s pension freedoms, but deciding how to take your money at retirement is extremely difficult and can be overwhelming for most people.
A lack of affordable, accessible, regulated advice for those with smaller pension pots means we are now on the cusp of a “mis-buying” scandal, with people making hugely important decisions about their retirement income without the right support. We estimate nearly half a million people retire each year without taking financial advice. This must be addressed so that everyone, no matter how much they have saved, can access advice.
If we fixed the problem and encouraged more people to use advice, whether through traditional routes or newer solutions, everyone would benefit. Not only would individuals be better off in retirement – typically someone who shops around for an annuity receives a 23 per cent increase in retirement income – but they would be less likely to rely on state support and could contribute more to the economy in the long run.
We won’t be able to close the advice gap, however, simply by tinkering around the edges. To meet the needs of the mass market, we need fundamental change.
Low-cost, regulated advice solutions already exist, bringing the price closer to what consumers are willing to pay. For example, LV=’s Retirement Wizard offers fully regulated online retirement advice for just £199. But industry action must be supported by regulatory and legislative reform.
The government’s starting point should be a single definition of “advice”. Our research shows people are confused about the various levels and types of advice and this puts them off taking it. We would like to see three, easy-to-understand categories: “information”; “government backed guidance”; and “regulated advice”, with clear descriptions about what each offers. This would help people understand the value of advice and the guarantees and protection it offers.
I also firmly believe that government has a role to play in incentivising advice to kick-start demand, for example by providing a voucher to pay towards regulated advice. Six in 10 over 55s told us they’d be more likely to use a financial adviser if they received a voucher.
The review must also look at how to help the most vulnerable access advice. We think advice should be free for those with the smallest pension pots, whose money will need to work extra hard in retirement, and LV= has offered to work with government to offer pensions advice for free using Retirement Wizard.
It should also be a requirement for anyone who doesn’t take advice to use Pension Wise, so no one is without support. While this is only guidance, it is a useful starting point and can help people understand when they might benefit from regulated advice.
Ultimately, there are many factors contributing to the advice gap, but if we are to avoid a “mis-buying” scandal in the next few years, these must be urgently addressed. It’s up to government, regulators and the industry to make that happen and ensure no one misses out on the help they need to get the most from their savings.