The FCA’s Retirement Income Market Data serves to highlight the very real need for the Advice Guidance Boundary Review to focus on the advice retirement gap, says Steven Cameron, Pensions Director at Aegon.
The latest FCA Retirement Income Market Data shows just how critical it is that the Advice Guidance Boundary Review focusses on plugging the support gap for those moving into retirement. Here arguably more than anywhere else, individuals need support and while that would ideally be full holistic advice, a wider range of support solutions could benefit millions.
The numbers of individuals affected are huge. In the 12 months to Q1 2023, 739,535 pension pots were accessed for the first time, up 5% from the previous year. While this will include some individuals accessing multiple pots, there are hundreds of thousands of individuals who would benefit from a wider range of support services.
In a post pension freedoms world, individuals with defined contribution pensions have more choice than ever – drawdown, various forms of annuity, Uncrystallised Funds Pension Lump Sums (UFPLS) and full encashment. Ideally individuals would seek full financial advice on choosing between these and then finding the optimal solution within the chosen option or options, but as the data shows, not all do. This is why the FCA and industry need to focus on where a lighter or narrower form of support, be it the Advice Guidance Boundary Review simplified advice or targeted support, could play a role.
One area to consider is picking the right type of annuity. According to the data, 83% of people who bought an annuity chose a level annuity, and 69% a single life annuity. While these options might be appropriate for many, they may often be picked as default without giving proper consideration to escalating or joint life annuities which will start with a lower income but could be more valuable for some longer term.
In terms of drawdown, while it’s encouraging to see 55% seeking advice, 37% were non-advised and only 8% sought support guidance from Pension Wise. While full advice should be encouraged, allowing regulated firms to offer a wider spectrum of Advice Guidance Boundary Review solutions here could help close a major gap.
The huge number of pots being fully encashed is also concerning. Over the 12 month period, this added up to 420,727 pots of average value £12,521, with 67% under £10,000. While someone with a single pot of under £10,000 won’t be able to use it to secure a lifetime income, there will be some individuals with several small pots who are encashing them all. This is another area where simplified advice or targeted support has the potential to aid better decision making.
