Phoenix Insights has published a briefing paper on the subject of targeted support in financial decision making to better understand how consumers would engage and benefit from the service.
Targeted support, as proposed by the Financial Conduct Authority, seeks to fill the middle ground, fitting between factual and generic information and financial advice. It would allow authorised financial advice firms to harness customer data to offer ‘best interest’ based suggestions to a target cohort. It could apply to a range of financial decisions, including decumulation decisions taken by members of defined contribution schemes.
According to the paper, ‘Supporting consumers at retirement: What role could targeted support play?’ consumers with moderate to high levels of defined contribution savings and no or low defined benefit entitlement have been found to be most at risk of making decisions that can have a significant impact on their retirement outcomes.
According to the think tank, there is concern for consumers whose level of defined contribution wealth could, on top of the state pension, give them a reasonable replacement rate of earned income if they made the right decumulation decisions and did not simply withdraw their pension at the earliest opportunity.
“It is the mass market consumer, whose only other real asset is their home, who is thought to be at the greatest risk of harm without support. For this consumer, engagement at decumulation might be their only interaction with their pension provider, their only experience of accessing an investable asset and potentially the first time they have thought about how they will use their pension. So, the stakes are highest for the consumers, who from age 55, may enter entirely unfamiliar and complex terrain and be without professional advice,” Phoenix Insights said.
In contrast, those with a higher level of assets are at least risk of harm, driven by their ability to pay for advice and belonging to social groups in which accessing professional advice, especially around key life stages and decision points, is the cultural norm. At the other end of the scale, those with low incomes and those with small pension pots who cannot afford advice, could be at risk of harm without support, particularly on the tax and benefit implications of withdrawing a lump sum and drawdown products that would give them a modest top up to their state pension.
However, stakeholders have warned that targeted support does not offer a silver bullet to the wider pension challenges consumers face and much depends on how it is implemented and delivered, the think tank said.
Catherine Sermon, head of public engagement and campaigns at Phoenix Insights, said: “At retirement many people suddenly face huge decisions about how to use their pension pot after a lifetime of potentially very little engagement with their savings. Some choose to take professional financial advice if they can afford to do so, and the remainder, if they use anything at all, access freely available guidance services which provide helpful support but is not personalised to individual needs or circumstances.
“Targeted support could enable firms to provide more tailored support to customers so they are better informed to make decisions. This would be a big change from the status quo, and we believe it’s vital to understand more about how people would use this, to understand any risks, and work to ensure the best outcomes for savers. Our research is designed to bring informed individual consumer voices into this discussion.”
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