MEDIA CENTRE
Media Centre
29-06-2009
New study calls for fresh thinking for retirement market
- Decumulation market needs to be viewed as a market in its own right
- Onus on individuals to make adequate provision for retirement income
- Independent financial advice in the workplace to be better promoted and funded
- Clearer guidance for those advising individuals in and at retirement
A landmark study of Financial Planning through Retirement from the Association of Independent Financial Advisers (AIFA) and Prudential UK, outlines changes required by Government, retirement product providers and independent financial advisers to ensure people in the UK maximise their income and wealth in retirement.
The study was overseen by an Editorial Board that included Rt. Hon John Gummer MP, Independent Chairman of AIFA and Lord Lipsey, ex-Chairman of the Financial Services Consumer Panel.
The report is being launched today at a Whitehall event with Shadow Pensions Minister, Nigel Waterson MP.
In the face of increasing longevity and the scaling back of defined benefit pension schemes the report calls for an independent review of the decumulation market, where people use their accumulated assets to finance their retirement.
It also recommends that Government and regulators must share a common approach and objectives and recognise the importance of the market in its own right.
The study makes a number of recommendations and identifies key concerns with the decumulation market.
Greater investment needs to be made to help those approaching, or in retirement, and those advising them.
First, how people actually manage their finances, rather than how experts would like them to manage them, and the encouragement of greater responsibility for personal finances. Employers and Government should play a greater role to encourage independent financial advice in the workplace.
The existing £150 per annum tax exemption for advice to employees should be better funded, facilitated and promoted. Education for consumers, including a glossary of terms, and clearer guidance for advisers.
To address the savings choices of individuals, all education and guidance tools must be flexible enough to accommodate the individual choices of consumers. And finally, recognition that the decumulation market is a complex market in its own right. Not least, because retirees go through a number of ‘financial phases’ that require different solutions.
Chris Cummings, Director General, AIFA, said: “There must be an holistic approach to the decumulation market from industry, Government and regulators to ensure that more people maximise their income and wealth in retirement.
"We must make sure that consumers can access good, professional advice when needed and that the industry can provide access to a wide range of services and products to utilise the variety of assets retirees now have.
“It is clear that consumers will understand the risks and rewards of decumulation products better if they are described in consistent language. Our research shows that more than half (56%) do not understand the language used when talking to people in financial services.
"That is why we are calling on the pensions industry to work together to develop a glossary of terms in plain English that guarantees simplicity and clarity for consumers.
"However, we must recognise that consumers want access to advice not just endless information. That is why they turn to IFAs. Government and employers must do more to help consumers receive this advice.”
Barry O'Dwyer, Managing Director, Retail Life and Pensions, Prudential added: "The population is getting older and people are living longer. For most people, investing a relatively small amount of time in seeking out financial advice about retirement is one of the best decisions they will ever make.
"This applies to pensions and annuities, but also increasingly to non-pension wealth including property, where we are calling on Ministers to ensure that consumers can release adequate amounts of equity from their home without losing means-tested benefits.
"The report also suggests that industry and regulators need to act on the insights of behavioural finance. It is a fallacy, for example, for regulators and product providers to assume that consumers diligently read all the information targeted at them and respond in a rational manner.
"The reality is that such communications are often either ignored, or drowned out by other news. One of the lessons of behavioural finance is that the workplace provides a cost-effective channel to engage employees.
To realise this potential the report calls on the Government to provide a more generous tax break for workplace advice."
Summary of recommendations:
- Regulation and legislation should be based on how consumers behave rather than how perfectly rational consumers would behave
- There should be a review of financial capability programmes to ensure they are improving financial education levels as cost-effectively as possible
- Independent financial advice in the workplace should be better promoted and funded by the Government and employers
- Clear guidance and training is needed for those who provide decumulation advice
- There is a need to continue to develop and improve products, which have a broad band of suitability that can be understood by the consumer
- Product providers should adopt a consistent approach to product features, product suitability, product comparisons, and risk and rewards. An industry standard glossary of terms should be agreed
- Regulation should be amended to allow greater consumer access to advice on equity release
- The level of capital disregarded for retirement means-tested benefits should be reviewed on a regular basis to ensure the rules do not penalise equity release
- The Government should establish an independent review of the rules requiring pension income to be secured by age 75 to ensure they appropriately balance the needs of retirees with the interests of taxpayers
- A critical success measures for the RDR should be that it increases the availability of advice and guidance and raises the level of engagement with consumers.
- We recommend the Government commissions an independent review aiming to deliver institutional arrangements that ensure a joined-up regulatory and public policy approach to decumulation
The project was overseen by an Editorial Board that included representatives from the parliamentary, business, consumer and academic communities:
- The Rt Hon. John Gummer MP (Independent Chairman, AIFA)
- Lord Lipsey (ex-Chairman of the Financial Services Consumer Panel)
- Professor David Blake (Director of the Pensions Institute, Cass Business School)
- Allen Rosengren (Joint Chief Executive, Lighthouse Group)
- Mark Lund (Chief Executive Officer, Money Portal)
- Chris Cummings (Director General, AIFA)
- Barry O’Dwyer (Managing Director, Retail Life and Pensions, Prudential)
- Tom Boardman (Director, Retirement Strategy and Innovation, Prudential)
Research to support the study was conducted by a team of specialist financial services consultants from Watson Wyatt.
Financial Planning Through Retirement
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