Since April 2015 pension changes have allowed more choice and flexibility for people but the provider options are limited. Why has the pension withdrawal market not been cracked yet? What makes this so difficult?
It seems like the simple answer is that it is difficult and risky for the pension providers but is that over simplifying it? Are the problems the same for the Advised clients? What are the difficulties for Financial Advisers, and do they have any online options?
From talking to our Adviser clients, we know they struggle at the outset in gaining permission to deal on behalf of the customer, and this is not just restricted to pension withdrawal options. From an adviser perspective, the process of gaining permission varies widely from one provider to the next and usually the initial set up is manual from the start. Risk does play a factor here, with many companies still preferring the wet signature approach on the initial set up.
Having a good application process online, with all the required options laid out clearly, with explanation where necessary, should help to remove the need for paper applications and the need for wet signatures. But is it that simple? As a minimum, all platforms, retirement or otherwise, should provide the basic start, stop and amend functionality with flexible systems, accepting a level of risk.
A customer has a few options available to them when they reach 55. They can do nothing; They can transfer their pension savings in full to a decumulation product; They can transfer their pension savings in part to a decumulation product; If they do move their savings they can take their tax free cash lump sum straight away, but not take a regular income or they can begin taking a regular income immediately if they want to. The provider needs to consider which of these options it wants to offer online and which options will meet the requirements of its prospect customers. Where money is part transferred it will need to handle Crystallised and Uncrystallised pots of money or amalgamate the money whilst keeping track of which holdings are which.
We recently carried out some research for a client on this subject and the outcome was that the choices are limited. Of the 14 platforms we reviewed that offer pensions, 13 facilitate decumulation but of these only 2 give the investor the ability to withdraw via a digital journey, and these are non-advised. The Advised market does not paint an improved picture either.
Research from State Street in 2016 suggested that relatively few investors are confident that they will make the right decision, and many were overwhelmed by the options. Do I want a guaranteed income? Should I take a lump sum… If so, how much? Do I need to provide for a partner? Will I need a lower/ higher income as I get older? The implications of getting these decisions wrong would be life changing. You could run out of money during your retirement, find your income eroded through inflation or end up with an income that does not meet your basic living needs.
For a provider, balancing advice to the investor on the right investment strategy with the right income approach is a difficult one. The line between guidance and advice is very thin and many online firms are nervous of providing simple guidance in the fear that it may be taken as advice. Given the range of options an investor has when withdrawing from a Pension, an online journey could very quickly become very convoluted leading to a long and confusing experience for the customer. Will a customer stick through all the questions that would need to be asked to allow an algorithm to build up a sufficient picture to provide meaningful guidance/advice? Will the customer have all the information they need to answer the questions? Will they give up and seek reassurance from a person?
These together may hint at why progress in this area lags behind development in other forms of Robo advice.
There has been talk of putting regulation in place to make it mandatory for Investors to seek advice before they withdraw from a pension, however individual personal advice can be too expensive for some. The Government has recently rejected the idea of default decumulation pathways where providers would offer a default solution targeted at the core of their customers. Their view being that too many customers stick with their existing Pension Provider when withdrawing from their pension, rather than shopping around. The use of default pathways for withdrawing a pension had its complications but would have the potential to make online solutions easier.
The industry needs to do more for consumers who wish to transact directly with the platform. So, anyone who can crack the magic code and find a solution to the problem of offering a cost effective online withdrawal offering will encourage others to do the same.
Written by Jayne Brown Wealth Consultant at Simplify Consulting 1 February 2019