With the introduction of pension freedoms, as well as an ageing population and an ever-increasing state pension age, later-life income has become something of a hot topic in recent years.
The Financial Conduct Authority recently published the findings of its thematic review of retirement income advice, as well as sending a 'Dear CEO' letter highlighting the actions that firms should take following the review.
The concern is that the way in which consumers access their retirement savings is changing, and people (on average) will now live much longer after retirement – the government's last statistics suggest that people will live on average for 22.8 years after giving up work.
The FCA's findings were mixed, with some firms having adapted their approach following the introduction of pension freedoms, while it seemed some firms weren’t really considering the needs of consumers.
The FCA confirmed firms should make use of the retirement income advice assessment tool (RIAAT), which has been established to consider the suitability of advice files.
The FCA's expectations of advisers were expanded on in the 'Dear CEO' letter, which stated that firms should be:
- Comparing their own work against the examples of good and bad practice included in the thematic review.
- Making use of the RIAAT to establish whether the FCA would consider the advice suitable.
- Reviewing the FCA article on cash flow modelling to ensure the modelling is suitable.
The FCA has confirmed it will be reviewing the market more generally going forward and will be carrying out further supervisory work.
So, what does this mean for advisers?
The adviser's role
Arguably the importance of an adviser has never been greater.
Consumers face complex financial decisions and while many will want to focus on their current financial situation, advisers will need to steer them to consider what their needs will be in 10 or 15 years (or even longer).
This is an area where advisers can really shine (as well as earn their fee), but it's not without risks.
Each retirement journey and the needs of those individuals will be different.
Thorough fact-finds will need to be conducted to understand the consumer's financial stability, their goals, health considerations and their attitude towards risk. There's no one size fits all approach.
Equally, advisers will need to deal with clients that may have objectives that aren’t suitable for their long-term needs.
Advisers will need to tread carefully here and document that they have explained the risks if a customer chooses to pursue an objective aligned more to 'wants' than 'needs'.
Given the popularity of drawdown, accurate and realistic cash flow modelling may be key to defending complaints.
If the adviser can show that a realistic and agreed upon retirement plan was sustainable to a point beyond the estimated age of mortality, based on a sensible rate of return, then this will form a good starting point for a defence.
Whether the cash flow modelling is appropriate will of course depend on the thoroughness and accuracy of the fact-finding and 'know your client' process.
Following on from the above, advisers should also be considering all potential options (including annuities) and recommending the most appropriate, even if this is something that the customer themself did not want to consider.
