Politicians have painted annuities as ‘toxic products' but guaranteed income is the bedrock of retirement for the majority. Providers are betting on simplified advice to square the circle, writes Jenna Towler
When it comes to establishing effective mass market retirement advice, political thinking is "frankly pathetic", according to Royal London chief executive Phil Loney.
Speaking at the Personal Finance Society 2014 conference, he said "developing a workable, affordable advice framework for the vast majority of ordinary people in the UK", as well as increasing financial literacy levels, should be key priorities for the next government.
However, he told the audience of advisers: "They are not ambitious things, but frankly the level of thinking on them in most of the political parties is pathetic."
Loney, speaking during a panel debate with Just Retirement's David Cooper and Prudential's John Warburton, said while the pension freedoms – due to kick in this April – were to be welcomed, they opened a Pandora's box for retirees who generally have low levels of financial confidence and knowledge.
Throwing caution to the wind
He explained customer inertia was a massive threat to the success of pension freedom and that it could only be conquered by a combination of increased financial awareness and widespread advice.
"There is a lot of customer inertia, [and there is a danger of] people sleepwalking into uncompetitive solutions. That is not addressed in these reforms.
"We do not have any long-term strategy to start to build people's financial awareness. A 40-minute guidance conversation at the point of retirement after 40 years of saving is a start, but it is only a start."
Loney was unequivocal in his call for financial "self-awareness".
"If we do not build people's financial self-awareness, then they will take financial products, which could be perfectly reasonable financial products, but use them in the wrong way".
Non-advised drawdown could be an issue here, he warned: "I do not think guidance will be the enemy of advice – in fact, the opposite. As people start to understand their finances better, they start to appreciate the true complexity and the risks that they face, which makes them more amenable to look for, and to pay for, advice."
Cooper, sales and marketing director at Just Retirement, agreed: "Two things concern me from a consumer risk perspective and, again, advisers can help with these.
"One is this idea that it would be good to cash in a pension and invest it somewhere else. That strikes me as ridiculous. The other one is what Phil has mentioned: inertia."
He added: "The fact that there is more complexity, myriad options for consumers, and that someone can be sat in a global equity fund unwittingly until their 90th birthday, well, the risk of that has just gone up, not down. I think we will get to a good solution, but we have to work together on that."
Cooper holds great faith in the concept of simplified advice to address the issue. He told delegates: "For the retirement income market, the demand is so great and the need is so high we need a fairly radical, robust solution. I am hanging my hat on simplified advice."
Cooper said three parties – providers; advisers who are willing to get involved; and the Financial Conduct Authority (FCA) – needed to work together to get simplified advice operating at a national level.
"Providers have got to play products into that [simplified advice space]; the advisers who want to do it; and the FCA can play a big part in bringing simplified advice to life."
The regulator released a consultation on simplified advice also known as focused advice, in July. And in October the watchdog also offered help to financial advisers who want to build simplified advice models, saying it was prepared to give 'individual guidance' or an "informal steer" as part of its Project Innovate.
Advisers and industry commentators have previously said it is essential regulation costs associated with advice are lowered to make serving the mass market cost-effective.
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