Over the last few weeks I have
explored the issues around fees, and why individuals may consider advice versus
DIY.
Obviously I read a lot and it is
clear that whether we like it or not the train that is RDR is traveling full
steam ahead. My conclusion is that RDR brings to the fore some interesting
discussion points which a number of people are missing, or perhaps don’t know
how to tackle.
A lack of savings
Recent ONS statistics showed only
14 million people contributed to a private sector pension in 2011, this is the
lowest level since 1950. Looking at it another way this means 11 million
employees are not saving for their retirement.
However, with the introduction of
auto enrolment it is estimated that between 5 and 10 million “savers” will be
created over the next five years, and that this will be worth £100 billion by
2050. Consider this, someone on the minimum wage paying the minimum into Nest will
have saved £150 in the first year!
A distinct lack of financial
planning
Those hitting retirement today
are faced with a number of challenges – low annuity rates and a rapidly
changing landscape. Interestingly 90% of those retiring are opting for an annuity
as the default option.
I have said in other blogs about
longevity – in 1980 a male retiring at 65 would expect to live a further 10
years, now it is 18 years. In fact a couple in good health at 65 would have a 1
in 4 chance of one of them reaching age 99.
To explore why people go down the
annuity route is easy when you consider the average pension pot is just
£18,000. Pre or post RDR individuals have little hope of getting any advice on
this and therefore there only options are to buy what is offered to them or buy
from a direct provider.
RDR is about survival of the
fittest
I recently read this quote “it is
not the strongest of the species that survives, nor the most intelligent that
survives. It is the one that is the most adaptable to change.”
If we consider the lack of
savings; auto enrollment is a positive step but is it not just promoting a
broken model that doesn’t reflect the changing environment we are in. Consider
someone leaving school at 18 and perhaps going to university. At 21 they have a
degree but debt, they then get a job. What are their priorities? Possible to
pay down the debt, perhaps to save for a house? Auto enrollment may put them in
a pension but actually it is not promoting the idea that the individual needs
to take responsibility for their retirement planning, and why should they at
21?
When it hits the individual that
they need to take control they might be in their thirties or forties and by
then they are faced with a mountain to climb. If we consider the default Nest
option, and possible other options. There is no advice, limited fund choice and
a lack of portability.
The second point to this is that
we seem fixated on this mythical 65 retirement age. We hit 65 and we want to
continue to enjoy the standard of living we had when we were employed, the
problem is many have done nothing to save towards this. And who do we blame?
The state for not providing an adequate pension in retirement.
RDR will restrict those seeking
advice for smaller sums to finding advice, to be honest this has already been
happening over the last five years. To some extent costs are an issue but in
reality it is the value of the clients assets and their ability to pay. So by
that if the cost of advice is a percentage of assets managed then perhaps
£50,000 is the threshold for advice. An alternative could be to write a cheque
for advice but many people will not see the value of writing that cheque.
So the point is this we are
moving to a situation where we need to take responsibility for preparing our
retirement strategy and we need to do that early. If we don’t take
responsibility for this then we are heading for a massive road crash.
And this is the point - RDR is a
fantastic opportunity but the focus is about how advisers charge and what their
service proposition is. It is clear that many people will fail to find advice
and it is assumed (and I am one of those who assumed this) that they will take the
DIY route - the problem with this assumption is that it assumes these people know what to do.
I say this because I believe that
many DIY providers are treading a very thin line between advice and non-advice,
and I wonder when someone starts to challenge this if it all falls apart. What
do I mean by this? Some DIY provides outwardly state they provide financial
education, when actually all they do is sell products and investments. Clearly
people buy the products and investments because they are “recommended” by the
provider, and not because they have considered whether they are right for them,
this is the danger.
You see RDR is what it is and it
will split the market – we have assumed it will force people down the DIY route
but we have to consider that many will simply do nothing until it is too late.
I want to consider a child born today and retiring at age 70 (2082), will we be
talking about a generation of poverty stricken pensioners because we had an
opportunity to do something positive in 2012 but ill thought out legislation
and too many vested interests destroyed any hope of delivering what is really
needed.
In conclusion the survival of the
fittest relies on individuals realising they have to take responsibility for
their retirement and planning for it; this could be that initially they opt to
do it themselves and then as assets grow they seek advice. But the point is
that this has the danger of being the minority rather than the majority.
Politicians seem out of touch,
and don’t know how to tackle this. To be fair do any of us know how to tackle
this? I do however think journalists could help, as could financial planners
(for example we have just launched a financial education website, and others
are doing similar exercises), the challenge is whether we are up to it.
