Adviser charging at retirement can be a bad ingredient in decumulation strategy, says Aon corporate pensions technical manager Adam Burn
Noel and Sandi or Mel and Sue? Mary and Paul or Prue and Paul? Far be it from me to judge whether the Great British Bake Off was better on the BBC or cheered up by Channel 4.
Regardless of who’s in charge of the big white tent, some elements of Bake Off have remained as consistent as a star baker’s scones. You can be confident that at least one contestant will carefully plan a recipe, skillfully blend, mix or knead their top-quality ingredients, fashion the requisite number of required delights…only to open the oven door too soon, drop the contents on the floor or discover that someone else has accidentally thrown away their custard.
The Great Workplace Pensions Retire-off might not rack up quite as many viewers on a Tuesday evening – but there are some similarities. Employers provide staff with (hopefully good quality) raw ingredients for retirement, through pension contributions and a scheme to put them in. And, if you want to really drag out this analogy, they also support communications, thanks to Noel and Sandi, and a robust layer of governance in the shape of Paul and Prue.
Unfortunately, the comparisons also hold true as employees approach retirement. The freedom and choice options that individuals have after the age of 55 should enable them to reap the benefits of saving into a pension. But limited support and variable access to advice risk making employees’ retirement decisions the equivalent of a dropped baking tray. Unlike Bake Off, the consequences could last a lifetime.
There is now evidence that taking advice makes a quantifiable difference. Research carried out by the International Longevity Centre UK in August this year found that people who had taken financial advice between 2001 and 2007 were between 17 per cent and 39 per cent more wealthy by 2012-2014 than those who had not.
Why should employers help with employees’ financial decisions? You might argue that a business has done its duty by the time an employee reaches retirement. After all, it has contributed funds into the pension – it’s now up to the individual to decide how to use that money.
But when employers have taken such care – and invested significant amounts of money – in helping staff to build up their pension pot, it makes little sense to leave employees to find their own way. At-retirement decisions are arguably the most critical and difficult part of the whole workplace pensions lifecycle, but often receive the least support.
Our case study, below, highlights just one example of the decisions that employees are faced with. Annual management charge (AMC) models can offer value if they are properly, fully explained – but in the case of the example below, the fees would have been completely out of kilter with Peter and Alison’s needs.
What might appear to be an appealing, ‘free’ prospect in the short term can have painful long-term consequences if individuals don’t weigh up all the possible charges. Without education or advice, how many people would be able understand the difference? The workplace ‘safety nets’ of payroll, HR, scheme advisers and in-house pensions teams evaporate when an employee leaves the workforce, so there may be no-one to ask for ad hoc support. Even knowing where to get started can be difficult, and we are seeing increasing numbers of employees buying complex products such as flexible drawdown without taking advice at all. According to recent data from the FCA, over 30 per cent of individuals accessing drawdown for the first time are now doing so on a ‘DIY’ basis without seeking advice.
For many pension scheme members, this will be a technical challenge too far. Once someone consolidates pensions, buys an annuity, goes into drawdown or withdraws cash, the decision is often irreversible. And as Peter and Alison’s example shows, even apparently small variations in the way that advice is charged can have a substantial impact on individuals’ savings. This, in turn, affects the pension fund they will have available to support them for the rest of their life.
Over-55s are becoming used to the idea that they can now choose to access their pension savings in any number of ways. Equally, employers and schemes must become used to the idea of giving employees support with those choices. It is no longer enough to view at-retirement advice as the icing on the cake.
Case study – the hidden cost of ‘free’ advice
Peter and Alison are both aged 56. Their total pension savings are £600,000. They have decided that they want to consolidate all of their pensions and withdraw a 25 per cent tax-free lump sum to buy a holiday home. This will form part of their transition towards retirement, but they plan to continue to work for at least another 10 years, so they won’t be taking any income from their remaining pension pot.
They spoke to two advisers. The first quoted a fee of £2,000 for the advice and a recommendation for the best plan into which to consolidate their savings with any subsequent advice required to be paid for. The second adviser told them that he would not charge a fee upfront but would be paid by receiving a payment from any pension he used to consolidate their funds into at a rate of 0.5 per cent per annum, the approach known as adviser charging.
The prospect of not having to pay a fee out of their savings initially appeal to Peter & Alison however, when they explored the second adviser’s fee structure in more detail, they calculated that over the course of their 10 remaining years at work, when they were unlikely to require ongoing advice, these payments could total over £20,000, meaning their fund at retirement would be impacted by this amount.
The advisor explained that he would provide ongoing advice over the period leading up to and then in retirement so the charges levied would be in respect of this service. However, Peter & Alison felt that this would prove to be uneconomical as they didn’t feel advice would be required until they retired in 10 years’ time and therefore they decide to pay the advice fee of £2,000 in order to achieve their immediate aims.