What is the Financial Conduct Authority’s (FCA) review of retirement income advice?
This review is a piece of discovery work to explore how financial adviser firms are delivering retirement income advice and assess the quality of outcomes consumers are getting.​
Why are the FCA specifically looking into retirement income advice?
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Recommendations to generate a sufficient, sustainable income from assets which remain invested place a premium on the quality of firms’ advice processes: not just at the point clients first access their pension benefits but also as part of any ongoing services firms provide to their clients. The FCA will therefore be keen to assess how firms’ advice processes manage these risks and whether firms are delivering suitable advice consistently.
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Since 2015, there has been a significant shift to consumers drawing an income from pension funds which remain invested. Advice in this area can be complex, so it is important firms understand the needs of their consumers and ensure their advisory solutions deliver consistently suitable advice.
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What is the problem?
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In 2015 the Pension Freedoms introduced flexibility for people accessing their pensions. While a positive development for many, with greater product choice, the lack of a requirement to purchase a guaranteed income means all the responsibility of making a pension endure shifts to the individual. Unfortunately, data from various sources demonstrates that many retirees lack both the understanding of what is a complex set of decisions, and the necessary support to guide them through them, and this results in sub-optimal outcomes. For instance, according to FCA data, in 2020-21, 49% of drawdown withdrawals were made at a rate of over 8%, which is double the sustainable level defined in Fidelity International’s Retirement Savings Guidelines white paper.
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What is different between the accumulation and decumulation stage?
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During the accumulation stage, market falls can be an opportunity to put more money into an investment portfolio, a chance to invest at a low price and benefit from a recovery.
However, during decumulation, taking a withdrawal from an investment portfolio after a fall in markets reduces the investment value further and therefore the scope for the portfolio to grow back. This means that it may not last as long as you need it to.
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You will still need to take an income when markets fall so it’s important to understand the risks during the decumulation stage and to plan ahead where possible.
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This is why getting the right decumulation investment solution is so important.
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Maintaining income when stock markets are volatile is a challenge many investment strategies are not equipped to deal with. Strategies that are designed to provide growth can falter when also required to provide income.
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What are the risks involved for a client drawing an unsecured income (e.g. Income Drawdown)?
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A key concern, given the financial pressures in the current economic climate, is that consumers draw too much income and run out of money in retirement. This is particularly relevant given increasing life expectancies and rising living costs.
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In addition, is your investment strategy appropriate for your attitude to investment risk, and will it deliver the level of income you need throughout retirement.
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Finally, income drawdown is only one way in which you can deliver income. It’s important to ensure income drawdown is still suitable and if not, identify an alternative solution.
Pension legislation has changed significantly over the years. There is a risk that you take action that adversely impacts your position, either tax efficiency or depletes the sustainability of your fund. These actions usually can’t be undone.
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How can I reduce the chances of running out of money in retirement?
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The easy answer is to take a lower level of regular monthly income. However, that does not necessarily need to be the case. One of the biggest risks is providing your income from an unsuitable investment proposition. Investing in the decumulation phase is completely different, and inherently more complex, than investing in the accumulation phase.
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The simplest answer is to take financial advice or seek a second opinion. Advisers can help you navigate the everchanging pension landscape. As well as this, they can help you structure a suitable and sustainable income strategy to fit with your needs. This is not a one size fits all solution. Personalised advice helps deliver better client outcomes.
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Should I be concerned about my own pension?
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As a starting point, if you are unsure how to answer any of the following questions then should seek professional financial advice.
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How is my pension invested?
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How much investment risk am I taking?
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How is my regular pension income funded?
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What level of income withdrawal rate am I currently taking?