While the pension changes are good news, without financial education and advice employees are vulnerable, not just to the headline grabbing scams, but to paying unnecessary tax, using the wrong assets for income in retirement, and ultimately not making the right decisions.
The Pensions and Lifetime Savings Association research of over-55s shows that people do need advice. Over half (52%) of those who expressed a preference for how they were going to access their pension savings thought drawdown would provide a guaranteed income, almost a quarter (23%) thought income drawdown was risk free and a quarter (25%) of all respondents thought their whole pension was tax free. This lack of understanding is worrying, and if people truly believe drawdown will provide a guaranteed income, this is perhaps why only one in five said they are willing to pay for advice.
The government does provide a free guidance service, Pension Wise, to help with the pension changes, but it only looks at defined contribution (DC) pensions – so not final salary pensions or other types of savings. This is far from a holistic approach, where employees may need to think about a number of different savings and investments such as ISAs, deposit accounts and shares.
One solution which has been discussed is the introduction of robo advice. Robo advice is really just a sophisticated self-selection tool. It isn’t widely available at-retirement yet, but may be soon. Most robo advisers offer a range of portfolios divided into risk levels. Investors are asked a series of questions to establish investment goals and attitudes to risk, and the system will then suggest investments which might be suitable for that individual.
There is a place for it for employees who are saving and want to make simple investment choices. However, with much hype surrounding the proliferation of robo advice there are several reasons why employees who are approaching retirement need to be wary.
- Is it actual advice? – Many individuals struggle to distinguish between advice, in which a specific product or strategy may be recommended by a regulated adviser, and guidance, which will provide an explanation of types of product or strategies but not a specific recommendation. It is important to realise that not all robo advice is ‘regulated advice’, so that individuals are aware that not all decisions will come with the same consumer protection as regulated advice.
- Not a holistic approach – Robo advice may not review an individual’s current situation or consider interlinked financial decisions. When it comes to retirement it is important for employees to consider many things including their tax status, partner’s assets, health, longevity, property, savings, inheritance etc. For example, some may be better off spending their savings before touching their pension, but this advice would probably not be available from robo advisers.
- The risk of mis-buying – Financial advisers are required to find out about an individual’s financial situation, and give advice suitable to their circumstances. With robo advisers the onus is on the customer to interpret the question correctly and then provide all the relevant information. Many people bought the wrong annuities in the past because they didn’t realise that this was one of the few occasions when admitting to having poor health or to being a smoker meant individuals would get more money.
- Many, many, many questions – Retirement income planning requires a lot of questions to be answered. This can be a long process face to face, but it is the advisers responsibility to get it right once they have established individual circumstances. After working their way through what can be a lengthy online questionnaire, are employees going to be sure they have answered all the previous ones correctly?
- Greater risk at retirement – If investment choices aren’t quite right in their 20s, 30s and 40s, employees still have time to try to do something about it. However the implications of getting it wrong at retirement are potentially so much bigger.
- Reassurance of expertise – When it comes to major life decisions how would employees prefer to make these? Most people ask a joiner and plumber to fit their kitchen, a lawyer to defend them in court, and a midwife to deliver their babies, all major life events which have major consequences, just like retirement income planning.
- Ongoing advice – Under the new pension rules many are likely to need ongoing help with their finances into old age and whilst many will be computer literate, financial decisions become harder and often have emotional elements which robo advice will struggle with.
- The fees – Even with all these warnings, for some it will still come down to price, however using robo advice may not actually save any money and could even cost more.
With so many things to get right, preparation and taking time to make the right decisions is critical. Poorly thought out decisions can be very costly, so taking full regulated advice could save employees money in the long run!