Mike Hogg of Standard Life talks about the long-term challenges and opportunities of pension freedom.
Despite the title, this article isn’t about an obscure 70’s prog rock band. It’s about how pension freedom is fundamentally reordering people’s financial lives, and why everyone needs to think very carefully before dismissing the recent spike in demand for advice as a short-term phenomenon.
Firstly, pension freedom isn’t an isolated event. It’s part of a deeper long-term shift in responsibility from the state and employers to the individual; from prudence and certainty to personal choice and flexibility. The decline of DB and removal of compulsory annuitisation take the complex trade-offs of retirement planning beyond the realm of the high-net-worth and self-employed to a generation of affluent employees. Notwithstanding the obvious appeal of a Lamborghini Aventador, most people faced with this growing complexity and uncertainty will seek out and pay for advice in some form.
Secondly – in between the long walks on the beach and drives in a classic car promised by provider marketing literature – clients in drawdown will need to return for potentially complex advice year after year. This creates an interesting snowball effect in advisory businesses. A short-term spike in demand was inevitable as some clients brought their retirement advice moment forward in light of the new rules. This spike will pass, but those who go into drawdown this year – most likely now a majority – will come back next year, along with a new clutch of clients considering their retirement options; and a large proportion of these clients will go into drawdown.
So it’s easy to see how, in just a few short years, retired clients could be the dominant segment in most advisory businesses, perhaps representing 75 per cent or more of active clients. Moreover, each of those clients requires more involved advice than a typical pension savings client. We’ve estimated that a drawdown client takes at least an additional two to three hours of adviser or paraplanner time per year. A number of firms I’ve spoken to suggest this number is very conservative.
Prepare for the explosion
So as the April spike starts to subside, be careful not to get too comfortable. Now is the time to prepare for the slow motion explosion of drawdown clients in your business. Compared to an average accumulation client, all of them will have tax optimisation opportunities pre-retirement, the need to manage tax liabilities on income drawn in retirement, and additional investment risk caused by pound cost ravaging. Most will also now have additional estate planning requirements as their pension pot becomes inheritable.
The question, then, is whether or not all of these needs can be met in a repeatable and scalable fashion within existing processes and propositions in your business. Our experience working with advisers suggests that most have at least some work to do, whether that’s amending their CIP to cater for volatility management or income strategies, adapting charges to reflect different advice costs, or defining a retirement-specific review process.
Finally, whatever changes you might be considering for your proposition to ‘generation advice’, you can be confident that many platforms and providers have substantially more to do to upgrade their own capability. Ask the question about their plans and strategy; a vague answer can sometimes be the most illuminating.