Last week I wrote about how the FCA is looking at pension freedoms again, nearly eight years after they launched. Specifically, the regulator wants to know if clients are getting suitable advice about drawing down income in retirement. To find out what’s really going on I spoke to Philip Hanley, a director and IFA at Philip James Financial Services, which is based in Oxfordshire. I posed him a few questions about how financial advice works in the era of pension freedoms.
Firstly I asked how IFA firms like his react when the FCA launches a review of this type?
A firm needs to make sure it’s well organised anyway, Hanley says, and there’s plenty of guidance out there already about what IFAs should be doing. “You need to measure your processes against what they’re saying should be the right thing to do,” Hanley says.
External compliance consultants are useful here to keep everything on track. These can interpret the existing rules and flag up any issues in advance. “It’s good to have someone external to monitor your processes,” he says.
The FCA talks about “suitable advice” and “quality outcomes”, but what does that really mean in practice? And how do you measure success here?
Regular reviews are the key to keeping clients on the right lines, Hanley says. It’s not a question of looking at a client’s position at retirement and then putting the file away. Pension freedoms have facilitated the idea that retirement is an ongoing and gradual process. “People may spend more or less than they expected,” he says, so that means adjustments need to be made along the way.
Being able to take out money at 55 was one part of pension freedoms. Do you find that clients approach you earlier now?
“In their 50s people’s minds become more focused,” Hanley says. People are now making contact before their state retirement age (currently 66). They tend to come with a collection of pensions they are trying to make sense of.
Have pension freedoms changed the conversation around retirement?
“Can I afford to retire?” used to be question asked to advisers. That’s changed now to a conversation about needs. “Now we ask you ‘how much do you need to keep the show on the road and live reasonably comfortably?’” Hanley says.
Are people now worried about stock market risk after a tricky 2022? Do they want to shift into bonds now they’re yielding again?
He tends to give clients the long-term view – that at the age of 60, the pension fund could still grow for another 20 years before it’s needed/sold. And it can be passed on to descendants too.
This week we’ve had unofficial confirmation of a change to the state pension age. Does this matter to clients?
A delay to retirement age is inevitable, Hanley says. But clients still model the state pension into their spending forecasts. For example, if you retire before the state pension age, you can spend more in the years before that kicks in – knowing your income will rise from that point. (The full state pension is heading up £10,000 a year for the first time after a 10% increase under the triple lock.)
Pension freedoms have triggered a blizzard of new products – ostensibly to meet consumer needs, but charging management fees are a big draw for the providers. Fees eat into returns of course. Is it hard for an adviser to choose a suitable, cost-effective fund?
Clients are most cost conscious than before, but they don’t always want the “cheapest” funds, he says. At the same time “an awful lot of clever retirement products have disappeared” since 2015, he adds.
Finally, I wanted to know if clients are desperate to get their hands on the 25% tax-free lump sum? That would certainly be my first question as a client. The temptation to buy a luxury car on go on the holiday of a lifetime must be tempting?
Hanley’s experience is that clients tend to be more cautious than the media thinks. “Most people are more careful with their pension money rather than extravagant with it,” he says, and are conscious that the funds have to last a decent period.
The government came under fire in 2015 for this aspect of the pension freedoms, with critics saying that it encourages irresponsible splurging. Hanley points out that retirees could find a way to do that somehow before the lump sum rules came in. “The people who would have blown their money would have done that in any circumstances,” he says.
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