There's no such thing as free pension advice

There is no such thing as free pensions advice.

Almost five years on from when the Government introduced the new pension freedom legislation and it is still difficult to know how things are going.

This has meant that anyone who wants to blame the freedoms for consumer harm can do so.

Last month, the Financial Times published a story based on a freedom of information request about those who had cashed in final salary pensions since 2015.

It found concerns about 80 per cent of the companies providing bad advice in this £80bn market. As a result, the Financial Conduct Authority planned to write to 1,841 financial advisers about potential harm in their advice. 

The estimable Mick McAteer, formerly of Which? and an ex-FCA board member, demanded a full-scale inquiry.

It came in the same month that the FCA admitted too much transfer advice was not at an acceptable standard.

The FCA’s intervention, in its letter to chief executives of financial advice businesses, should be taken with deadly seriousness.

It is clear from the tone of that missive that the FCA has advice companies in its sight – just at a time when the burden of regulation is already at its most choking.

It was interesting to see it positively demanding advisers turn in criminal or rogue businesses – a call I have been making for some time now.

Let’s hope that means good advisers turning the table on introducers and ending all ties with them.

But what are we to make of all this in the context of the pension freedoms?

Are mis-sold pension transfers to blame; is it criminal activity or poor advice; is it reckless consumers; is it contingent fees; was it the fault of the media for cheerleading the death of the freedoms; or is it driven by trustees desperate to reduce their liabilities?

Sadly, it is impossible to know, even though 160,000 people could be affected. 

The key argument against the pension freedoms seemed to be that consumers are fundamentally too stupid to be able to make their own decisions. It is certainly true that most will underestimate their own longevity.

We were told that everyone would gamble their money; if anything, the tentative findings we have already had from the FCA show that people are not taking enough risk.

We know that lots of people have cashed in pots, but any evidence that this only applies to smaller pensions is scant.

It may be the case that many should be taking annuities, but we do not know for sure.

And it is certainly true that when the pension freedoms were launched, the industry was utterly unprepared. 

I have seen arguments for minimum income requirements before people can access the pension freedoms, or that some sectors of the economy could be barred.

All that would do is make freedom a right of the rich – and that is clearly not good.

The freedoms are a great act of consumer empowerment, but having launched them on the public, the Treasury and the FCA should now launch a study into their effects so that we have a full picture of how people are behaving and the advice companies are giving.

It would not be fair for advice companies to bear the brunt of increased scrutiny without greater evidence of what actually has happened since 2015.

Whoever the permanent boss of the FCA is, he or she should make a full assessment of the pension freedoms one of their top priorities.

Source: James Coney is money editor ofThe Times and The Sunday Times@

Pension options at retirement

At retirement when we take our pension from a defined contribution scheme we have a number of options available to us.

• The open market option

• Tax free cash lump sum

• The frequency of payment

• Escalation in payments

• Spouses provisions

• Guarantee periods

Each of these options can be taken in conjunction with any other. However, some of the benefits will defray the initial amount of pension benefit that you would receive should you take a single life pension with no other provisions.

The Open Market Option

The Open Market Option (or OMO) was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to ‘shop around’ for a number of options to convert their pension pot into an annuity, rather than simply taking the default rate offered by their pension provider.

 The term OMO is now generally used to support a campaign, often led by the pensions industry and the media, to make sure people know the benefits of shopping around. The majority of people still don’t use the Open Market Option in large part because they don’t know they can or don’t realise the benefits of doing so. Retirees who don’t use the OMO and settle for the default deal offered by their pension provider, may be missing out on up to 20% more income from an annuity. This is especially important as retirees cannot change their annuity once it has been purchased.

 One of the main reasons that people can get more from an annuity if they shop around is that they may qualify for what is known as an Enhanced Annuity (sometimes known as an Impaired Life Annuity) which pays a higher income to people who suffer from a range of health conditions – anything from asthma to a serious heart condition. There are also other products available that may suit peoples retirement needs better than the default deal offered by a pension provider. One suggestion to make the most of the Open Market Option is to speak to an independent financial adviser who will explain the different options available at retirement.

Tax Free Cash Lump Sum

At retirement you are permitted to take 25% (a quarter) of your pension fund in as a Tax-Free Cash Lump Sum. In certain circumstances it could be more than this. The Tax-Free cash can be paid by the ceding scheme or the new scheme should you take advantage of your Open Market Option. The remainder will be considered as earned income by HMRC. The amount of tax you pay will depend on your prevailing tax status at the time that you take the pension.

Frequency of Payments

Most pension providers will allow you to take your pension at different Frequencies of Payments, such as annually, quarterly and monthly, sometimes in advance or arrears. Once you have made your decision that is generally how you will continue to receive your income for the rest of your pension annuity.

Escalation in Payment

You can elect to have your pension paid to you at a flat rate for the rest of your life or have it increase in different ways, through Escalation in Payment, typically by 5%, 7.5% etc. Should you choose this option then the initial pension you receive will be significantly reduced but at least you can ensure that your pension retains some degree of inflation proofing. 

Spouse’s Provisions

Typically people will purchase a single life annuity but you can elect to provide a pension for your spouse, through a Spouse's Provision should you wish to do so. This at least ensures that should you die in the short term your spouse will continue to benefit from your pension. Spouses pensions can generally be provided at different rates as a percentage of your own, for example 33%, 50% or even 100%. As with all other pension options its best to check what the pension provider is able to offer.

Again this particular option does reduce the amount of initial pension annuity because you are effectively buying two pensions from the same amount of money.

Guarantee Periods

At outset, as with all these options you can elect to take a guarantee period against the pension. 

A Guarantee Period can be of different duration, again typically 3, 5 or 10 years. This means that the pension will be paid out to your spouse (or in the event of your spouse predeceasing  you, your estate) for the remainder of the term should you die within the guarantee period. For example if you were to take a 10 year guarantee period and then die in year 6 your spouse (or estate) would continue to receive the pension for the remaining 4 year term, after which time, (unless you had provided for a spouses pension) the pension would cease and no other payments would be made.

These options are not offered at the outset of your pension plan as you have no indication at that time what your marital status may be at the time of vesting, the prevailing rates of inflation and your need for tax free cash. Nevertheless the decisions that you make in relation to these options are of great importance both to you and your family should you have one. Moreover once you have made your decisions they cannot be unwound, there are no “U turns”. It is therefore essential that you give consideration to taking professional financial advice at this pivotal and critical time in your financial planning.

The value of financial advice

Those who received financial advice in the 2001-2007 period had accumulated significantly more liquid financial assets and pension wealth than their unadvised equivalent peers by 2012-14.

‘The Value of Financial Advice’, produced by ILC-UK with the support of Royal London, analyses data from the largest representative survey of individual and household assets in Great Britain, the Wealth and Assets Survey. It finds that, even allowing for the fact that some groups are more likely to seek advice than others, those who received financial advice in the 2001-2007 period did better than an equivalent group who did not receive such advice, by 2012-14.

The report examines the impact of financial advice on two groups, the ‘affluent’ and the ‘just getting by’. The ‘affluent’ group is formed of a wealthier subset of people who are also more likely to have degrees, be part of a couple, and be homeowners. The ‘just getting by’ group is formed of a less wealthy subset who are more likely to have lower levels of educational attainment, be single, divorced or widowed and be renting.

‘The Value of Financial Advice’ finds that:

• The ‘affluent but advised’ accumulated on average £12,363 (or 17%) more in liquid financial assets than the affluent and non-advised group, and £30,882 (or 16%) more in pension wealth (total £43,245)

• The ‘just getting by but advised’ accumulated on average £14,036 (or 39%) more in liquid financial assets than the just getting by but non-advised group, and £25,859 (or 21%) more in pension wealth (total £39,895)

The report also finds that financial advice led to greater levels of saving and investment in the equity market:

• The ‘affluent but advised’ group were 6.7% more likely to save and 9.7% more likely to invest in the equity market than the equivalent non-advised group

• The ‘just getting by but advised’ group were 9.7% more likely to save and 10.8% more likely to invest in the equity market than the equivalent non-advised group

Those who had received advice in the 2001-2007 period also had more pension income than their peers by 2012-14:

• The ‘affluent but advised’ group earn £880 (or 16%) more per year than the equivalent non-advised group

• The ‘just getting by but advised’ group earn £713 (or 19%) more per year than the equivalent non-advised group

The report found that 9 in 10 people are satisfied with the advice received, with the clear majority deciding to go with their adviser's recommendation.

Despite the advantages of receiving advice, only 16.8% of people saw an adviser in the years 2012-2014. Indeed, ‘The Value of Financial Advice’ finds that even amongst those who took out an investment product in the last few years, around 40% didn’t take advice, rising to 78% of people who took out a personal pension.

After controlling for a range of factors, ‘The Value of Financial Advice’ concludes that the two most powerful driving forces of whether people sought advice was whether the individual trusts an Independent Financial Adviser to provide advice, and the individual’s level of financial capability. Therefore, the report makes a series of recommendations to raise demand for financial advice including:

• Using advice to support the auto-enrolled – duty on employers to ensure staff can access the best information and advice on their pensions

• Mandating default guidance for those seeking to access their pension savings – to ensure people can get crucial information in a complex marketplace and avoid worst outcomes

• Helping to create informed consumers through continued development and roll out the pensions dashboard

• Ensuring regulators continue to place emphasis on access to independent financial advice

Ben Franklin, Head of Economics of Ageing, ILC-UK said:

“Our results show that those who take advice are likely to accumulate more financial and pension wealth, supported by increased saving and investing in equity assets, while those in retirement are likely to have more income, particularly at older ages.

But the advice market is not working for everyone. A high proportion of people who take out investments and pensions do not use financial advice, while only a minority of the population has seen a financial adviser. Since advice has clear benefits for customers, it is a shame that more people do not use it. The clear challenge facing the industry, regulator and government is therefore to get more people through the “front door” in the first place.”

Source: A Research Report from ILC-UK

Making the most of your financial adviser.

Here are five ways you can make the most of having a financial pro on your side, and understand how to best use a financial planner so they can maximize the value they provide to you.

1. Be open, honest, and coachable

This should go without saying, but a financial planner cannot help you if you don't share openly with them. That means disclosing all the details of your financial life — and I know that can be really difficult to do.

But remember, your planner isn't here to judge you (or shouldn't be; this is why it's really important to do a gut check to make sure you actually like and trust your planner before hiring them).

Your planner should create a safe place for you to lay everything out on the table. Together, you need to understand where things stand now in order to make the best comprehensive plan for moving forward and getting to where you want to go with your financial life.

In addition to sharing the numbers, share your thoughts, goals, fears, and worries, too.

Personal finance is personal; money is much more emotional than purely analytical. How you feel about your finances will impact your behaviour and your actions, so sharing openly with your planner will help them design a strategy you will implement.

There are probably a lot of routes and options that will eventually get you to where you want to go. The best one is the one you'll actually stick with over time. 

Finally, you also want to be coachable. That means being:

• Open to feedback (and also open to change, based on that feedback)

• Willing to take action once you have a strategy in hand

• Ready to ask questions

• Interested in learning

The best financial planner in the world won't do you a bit of good if you're not willing to change or consider new things in the process of reaching your goals.

2. Accept the accountability your planner can provide

Knowing what to do is one thing — and your financial planner can certainly tell you the right things to do with your money to make the most of it and build wealth over time. 

But how many times have you started a diet or exercise program because you knew that's what you needed to do to gain muscle or lose weight… only to find you fell off the wagon less than two weeks into your new routine?

Knowledge typically isn't enough when it comes to behaviour change, updating habits, and making progress toward long-term goals that could take months or years to achieve.

To best use a financial planner, definitely take advantage of the knowledge, advice, and wisdom they can give you… but make sure you lean on them for the accountability piece, too. 

Your planner should assign you action items or tasks to take after each meeting in order to move forward.

These could be really tangible, like "increase your contribution to your pension plan," or "transfer that extra cash from your current account to a short-term savings goal or a long-term investment account." 

Or they could be really intangible, like "talk with your partner about your priorities and be ready to share at our next meeting," and "think through what you would like to do next: buy a house or start a business." 

In either case, your planner should also follow up with the accountability to make sure you get this done. Just like a personal trainer holds you accountable to getting in the gym and doing the reps, a planner can send reminders, check in with you between meetings, and make sure things don't slip through the cracks as you make progress with your plan.

3. Listen, especially when they advise against something

Most people are focused on what a planner will tell them to do to reach their goals. But one of the most valuable things you can get from a relationship with a financial planner is listening to them when they tell you not to do something.

When you get panicky and want to sell out of your positions in your investment that you set up for long-term wealth building? Listen when your adviser says, "let's sit tight and stick to the strategy we designed before you felt emotional about this."

When you feel pressured to buy a home because your local market is hot? Listen when your adviser says, "I understand you don't want to miss out, but the plan we built has you buying a home in 5 years. Let's keep working on building up the deposit you need to buy the house you want."

Your adviser can help you stay focused, disciplined, and consistent with the actions you need to take — and avoid — on your way to building wealth.

 4. Ask for referrals to other professionals who can go to bat for you

You probably worked really hard to find a financial planner you trust, like, and enjoy working with — and repeating this process for every professional you need on your team sounds a little overwhelming, doesn't it?

Thankfully, you can just ask your adviser for referrals and recommendations.

Most planners have a professional network because they know that's a huge value-add to provide to their clients.

So when you need a solicitor or an accountant, ask your financial adviser for a referral to someone they know.

5. Uncover your blind spots

What we know typically falls into two categories:

• The stuff we know we know

• The stuff we know we don't know

These two areas are pretty easy to manage. When we know things, we can use that knowledge to our advantage. If we know that we do not know other things, we can choose to learn or ask questions to get the answers we need from experts who do have a particular domain knowledge.

Where we can get into trouble, however, is with a third category of knowledge:

The stuff we don't know we don't know.

In other words, we can get into trouble with our blind spots. When we don't know we don't know something, we don't have the questions to ask. We don't know what we need to learn. 

The blind spots aren't the problem. It's not asking someone to check them for you that will cause issues. This is where your financial planner can come in.

They can provide an objective, outside perspective on your finances and your financial plan to look for those things you didn't even know to check or ask about.

Together, they can work with you to eliminate blind spots and shore up your defences against the unknown.

The potential shock awaiting retirees

The potential shock awaiting retirees

 A  study in April 2109 shows there could be an unwelcome surprise for those who save too little, too late.

How much income do you think you’ll need in retirement? *1

Research shows that UK investors expect to need an income equal to two-thirds of their current salary to afford to live comfortably. Yet, the average amount received by today’s retirees is far less, at 53% of final salary.

This gap spells disappointment for those individuals and couples who do not have the funds to support the lifestyle they would like in retirement. It also raises the rather difficult question of how much of our salary we should be putting away to maintain our lifestyles after we stop working.

According to research by Schroders, a 25-year-old who would like to retire on a two-thirds pension at 65 should be tucking away 15% of their salary each year.

At that savings rate, an average annual return of 2.5% above inflation would create a pot large enough to produce a retirement income to meet their target.

But if that person was to save 10% of their salary, the annual return they’d need would shoot up to 4.2% over inflation. 

If they were to save only 5% of their salary (the current overall minimum contribution rate for auto-enrolment), they may need returns that exceed inflation by 7%. 

Unfortunately, history is not on the side of investors relying on achieving that rate of return over the medium to long term.

The Schroders research revealed general acknowledgement by non-retired people that they need to be saving more to achieve the standard of living they want in retirement. The difference between what they are saving, and what think they should be saving, was the biggest amongst Generation X – individuals aged between 37 and 50 – indicating perhaps a growing concern that they are at risk of leaving it too late.

“To have the best chance of a comfortable retirement, the lesson for younger workers is to start saving early,” says Lesley-Ann Morgan, Head of Retirement at Schroders. “Leaving retirement saving until you are nearing your 50s and 60s is likely to be too late to make up the savings gap.”

It’s about time

Some experts suggest that if you leave retirement saving until age 40, then you’ll need to put away at least 20% of your income – and that you should maintain this percentage as your earnings increase.

If that's a tall order, there might be other opportunities to boost your savings rate; for example, a bonus or inheritance could make a big difference to your long-term prospects. So, if you have surplus cash that is not earmarked for other purposes and you haven’t used all your pension allowances, making a one-off pension contribution can be a smart way to get nearer that retirement goal.

Time is your biggest ally when it comes to saving, thanks to the power of compounding. But that doesn’t mean there aren’t significant opportunities to catch up, and the end of the tax year presents an ideal opportunity to do so.

Source: 1 Schroders, Global Investor Study 2018

So what is a good pension pot at 55?

According to Scottish Widows, someone who has left pension saving to their 50s would need to put away £1,445 a month to achieve a £23,000 annual income at retirement.

This estimate was derived using The Telegraph Pensions Calculator, assuming someone earning £30,000 a year, with contributions being supplemented with a 4% employer contribution. The calculations allow for inflation, both in discounting back the final results so they’re in ‘today’s money’ and in assuming that contributions increase with earnings each year.

If you are in your 50s, make sure you check when you’ll start receiving your State Pension. Research by YouGov for the charity Age UK conducted in December 2018 found that one in four people aged between 50 and 64, equivalent to nearly three million people, don’t know what their State Pension age is.

Source: Schroders