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The pursuit of pension
flexibility by insistent clients
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Any retiree can now access their pension fund(s), for any reason, and do
whatever they want with it. The money belongs to the individual, and not
only are they entitled to all of it, they can now choose how it is accessed.
Unfortunately, and this may touch a nerve with some people, not every
retiree is a financial expert equipped to make crucial financial decisions
regarding their pension funds. When not all of the consequences of their
actions are immediately foreseeable, this could create problems in the future.
So what are the issues – and how can you help guide even the most insistent
clients in making the best decisions for their circumstances? In this article
we’ll discuss this increasingly pertinent topic.
Driving factors
Flexibility has long been a driving factor for many retirees
when planning their retirement. But is it a misconception? For
many years true flexibility has only really been available to the
wealthier end of the retirement market, for those people who
could afford the costs and risks associated with drawdown.
The pension freedoms then tore up the rule book, allowing
flexibility to be available for all. But has it become a truly
liberating experience, or is it something that could cause
more problems than solve?
What does it actually mean when a retiree decides
to pursue a non-guaranteed solution, either through
drawdown or by withdrawing their pension pot, and cites
‘flexibility’ as one of the reasons for doing so? Do we have
to be more vigilant in separating the ‘fear of missing out’,
and using flexibility as an excuse, from the actual defined
objectives of the individual?
This is where the conundrum posed by the pension
freedoms really comes to life.
Call 0345 302 2287 or visit www.justadviser.com
Think – The pursuit of pension flexibility by insistent clients
For many retirees, they simply won’t have the level of
financial education required to deal with the complexity of
pensions, and it should be stressed that this is through no
fault of their own. Financial education hasn’t been a typical
part of our structured education system. What compounds
this issue is the terminology being used – for example,
references to accessing pension funds in the same way
as people would do a bank account don’t necessarily add
clarity to the situation.
Whilst most people have a bank account and know how
to operate it, because of this crossover in terminology, they
may have a misconception that accessing their pension fund
is no different. This could certainly be a factor that has led
to a great deal of frustration on the part of retirees, perhaps
encouraging them to insist on a particular course of action,
even when fully informed (through advice) to the contrary.
So where does this leave advisers? Well, for the most part,
it should be fair to say that if retirees are going to the effort
of seeking out financial advice, and are prepared to pay
for this as well, then there is a good chance they will value
what they are being told and heed the advice.
However, on those occasions when an individual has
gone through the advice process but rejected the
recommendations, or is dismissive of the value or cost of
advice and wants a more transactional approach, then
ensuring that all of the risks are explained (and understood)
is crucial.
This includes the fundamental risk that the pursuit of
‘flexibility’ is not a goal in itself, but the means to achieving
their true objective. If the ultimate objective is not clearly
defined, then any decisions made are immediately flawed.
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It’s a fine line to tread…
As a result, there’s been an increasing amount of discussion
about how to help and cater for retirees such as these:
those clients who are insistent on their own solutions
off the back of their new found freedoms, leaving many
advisers caught between a rock and a hard place.
So what does the FCA recommend? In June 2015, it
published a guidance note in which it looked to address
some of the concerns around how best to deal with
insistent clients. The paper reinforced the fact that there are
no hard and fast rules in place, but did outline three key
steps to ensure what it considers to be best practice:
1.You must provide advice that is suitable for the individual
client, and this advice must be clear to the client. This is
the normal advice process.
2.It should be clear to the client that their actions are
against your advice.
3.You should be clear with the client what the risks of the
alternative course of action are.
Defining the risks
The FCA paper went to the heart of the issue for insistence
and the pursuit of flexibility for many people looking to access
their pensions whilst not having a clear set of goals in mind:
“You must ascertain the client’s investment objectives before
making a recommendation. A request or preference by the
client for a particular solution – for example accessing cash
from a pension – is not an objective. You must ascertain the
client’s actual investment objectives so that you can advise on
a suitable course of action to meet them.”
Even once the retiree’s fundamental objectives have been
clearly identified, then of course there is no guarantee
that the recommended course of action will be the route
that the client had in mind, and can still result in adverse
decisions being made by the client. If this is the case, then
helping retirees to understand all of the risks they face,
including some of the less obvious ones, will at the very
least help demonstrate that a robust advice process has
been provided for the customer’s benefit.
Although these guidelines provide some clarity in terms
of what the FCA think should be happening, it remains
a difficult situation for advisers. They must provide
advice to a retiree resulting in a clear solution, ensuring
everything discussed has been documented including why
a recommended course of action has not been adhered to.
This then has to be aligned to a robust enough compliance
process, which is in place to protect or mitigate against
potential future complaints. If this isn’t watertight it opens
up potential business risks.
Call 0345 302 2287 or visit www.justadviser.com
Think – The pursuit of pension flexibility by insistent clients
If the individual is looking to access their pension funds
through drawdown, or by partial or full withdrawal, then it
may be useful to approach these risks in two separate areas:
Notional risks – these would be risks that are not
necessarily directly investment related, but will impact on
financial planning and have long term repercussions.
• Tax – how many people truly understand what they
should or shouldn’t pay tax on, let alone how much? It
probably still comes as a shock to many people that their
pension income is treated as earned income, even if it is
drawn as a lump sum. The difference between the gross
and net figure received could easily skew potential plans
for finances for the sake of a simple tax calculator
• Mortality drag – whilst drawdown provides instant
flexibility, it also instantly removes any guarantees or
cross-subsidy that a guaranteed income for life solution
using an annuity would provide. Also, understanding
why there is a need to achieve greater and greater
returns the older you get compared to buying an annuity
can be mystifying.
Cost of delay
It may be one of the more unfashionable risks that exist in
this field, but it should be considered if a retiree is thinking
of accessing their pension but delaying taking an income.
There are some very good reasons for not needing a
retirement income right away, but there is a danger that
people start to follow the herd mentality, signing up
to the notion that no-one needs an income from their
pension anymore. But, just like the inescapable mainstays
of death and taxes, then at some point the retiree will
need to find an income replacement for what had been
their salary or earnings.
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• Longevity and running out of money – perhaps a bit
obvious, but no-one knows when they are going to
die, and therefore simply cannot know how long they
will need their money for in retirement. The danger
is perhaps spending at the same rate in retirement
compared to when the individual was working.
Adjusting to a reduced or finite income, or lump sum,
takes some doing. In contrast, the individual may
become over cautious for fear of running out of money
and therefore not enjoy their retirement as much as they
might have done, had they considered all their options.
• Avoiding scams, and not giving up potential guarantees –
understanding the difference between a genuinely good
deal and when something is just too good to be true, is
an art in itself. To the uninitiated, this can be a minefield.
Investment risks – along with the usual criteria of
establishing a properly representative investment portfolio
that matches an individual’s risk appetite and capacity for
loss, there are several other risks that can bite, and are not
necessarily apparent, but their effects may be felt:
• Volatility and volatility drag – understanding why
investments are medium or long term, not jumping ship
at the wrong time, knowing why proportionately greater
returns are required after funds have fallen to get back
to the original value. All of this is relevant to ensure
investment decisions are made with a cool head, and not
based on emotions or panic.
• Negative pound cost averaging – an old chestnut, but
still overlooked. How many retirees understand why their
funds fall quicker when they are taking a fixed monetary
amount from their fund in a falling market?
The true cost of delaying an income when comparing
different options shouldn’t be dismissed. So what is the
true cost? You could describe it as the difference between
the total income that would have been received from
an annuity had the purchase not been delayed, and the
increase in the annual level of income that a delayed
annuity would pay, simply because of the individual’s
corresponding increase in age.
While it may seem at first glance that it’s worth delaying the
purchase to achieve the increased annual amount, in fact, it
may take many tens of years for an individual to recoup the
monthly income they missed by delaying the purchase.
Add to this the implications of any underperformance by
the pension fund if it remains invested during this deferral
period, and the client could be compounding the gap that
needs making up, just to breakeven.
For more information on delaying retirement
income, please see our ‘Does it always pay to
delay?‘ sales aid, visit www.justadviser.com/
documents/equivalent-age-sales-aid-does-it-payto-delay-1311494.pdf
• Sequence of returns and the impact of timing – the
order in which returns are achieved has an impact when
income is being withdrawn. Knowing when to take
lump sums out, or more importantly when not to, can
be a difficult skill to master.
Call 0345 302 2287 or visit www.justadviser.com
Think – The pursuit of pension flexibility by insistent clients
Summary
Ensuring that an advice process is watertight is always
going to be a challenge, especially when dealing with
insistent retirees who refuse to take your recommendation
based perhaps on their incomplete or inaccurate
understanding of their own situation. There are some
areas though that are worth revisiting to help mitigate any
potential pitfalls:
• Stand or fall by the suitability report – this is the one
thing that a client is likely to hold onto, even if they
disregard the advice and recommendations it contains.
If a future complaint arises and the detail isn’t captured
in this report, then evidencing that it happened or was
discussed becomes difficult.
• Outline all of the risks and pitfalls with their choice –
including those that are less obvious – ensure they are
bespoke, and explained so that anyone can understand it.
It is impossible to please all of the people all of the time,
and sometimes it may feel like clients need to be saved from
themselves. We have to accept that on occasion, differences
in opinion will occur which result in a disagreement about
the best course of action for an individual.
One of the outcomes of the pension freedoms is that
ultimately, even with a robust advice process in place and
the best interests of the client at heart, it is the client’s
choice to make.
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• Play back to the client in their words your understanding
of their specific objectives for the use of their pension
funds. Simply accessing a pension for the sake of
flexibility is not sufficient – what is the underlying reason
driving their need for flexibility?
Tony Clark
Product Marketing Manager
For more information contact:
Telephone: 0345 302 2287
Lines are open Monday to Friday, 8.30am to 5.30pm.
Email us: [email protected]
Or visit our website for further information:
www.justadviser.com
Just Retirement Limited. Registered Office: Vale House, Roebuck Close, Bancroft Road, Reigate,
Surrey RH2 7RU. Tel: 01737 233296. Registered in England Number 05017193. Calls may be
monitored and recorded, and call charges may apply. Please contact us if you would like this
document in an alternative format. Lines are open 8.30am to 5.30pm, Monday to Friday.
1311772.1
02/2016