From April we are expecting a surge in demand for income drawdown. However, how easy is it to offer these flexibilities to those with small pensions pots? Jamie Smith-Thompson takes a closer look
The pensions freedoms announced in March have changed the way providers and advisers need to operate. Smaller average drawdown investments could make it nearly impossible to provide an exclusively face-to-face service cost-effectively.
Before the Budget, annuities were the only real option for the vast majority of people. This became a problem when the bank rate dropped to the historic low of 0.5%, causing annuity rates to plunge.
From April, people will not be shunted towards an annuity, but instead will be able to use their pension fund how they want.
Portal Financial saw immediate public response to this: prior to the Budget, three-quarters of our clients
wanted annuity quotes and were not interested in advice on other options. After the Budget, more than 80% of clients wanted to know the range of options available, including whether it would be wise to leave their fund untouched until next April.
Such change can only be a good thing because even with annuity rates being low, many people did not shop around.
The Financial Conduct Authority (FCA) found that 60% of people stayed with their existing provider for an annuity, 80% of whom could have secured a better deal elsewhere.
The existing regulatory framework did not prohibit shopping around, but the Budget changes seem to have sparked awareness that there are more options than saying “yes” to a provider’s offer.
Coping with change
As positive as that is for consumers, there has been an ongoing debate within the financial industry about how to cope with the changes. There is no single way to do it, but one thing is clear: the traditional way will soon be redundant.
Objections and refusing to adapt may be seen as a way to keep things as they are, but I cannot see this working.
The public will expect the freedoms to be available to them and if their provider will not offer them, they will merely transfer to a company that does. Adapting to embrace this new territory is essential for any business to survive.
A problem with financial advice is that too many people do not take it, and one of the most effective ways of reversing that trend is to make it convenient for people to talk to an adviser. The modern world is a busy world and we need to acknowledge and respond to that.
We have developed our phone and online services so the experience for the customer is as easy and convenient as possible. As financial advisers, it is easy to forget that not everyone knows much about financial planning, nor do they find the subject appealing.
We have a number of mechanisms in place to overcome this, one of which is not accepting only the very wealthy as clients. Our average drawdown client’s fund is just over £50,000, and we anticipate that number dropping further after next April.
Advisers should also try to make the process easy for clients. Our firm offers free, no obligation pension reviews, which allow people to get a firm understanding of their funds, including the fees and overall performance, as well as any benefits or drawbacks of certain actions such as transferring or consolidating.
From their first visit to our website, they can arrange for us to call them at a convenient time, and they will talk to technically competent administrative staff. We then refer the clients to our paraplanners, who will talk with the client and create a report to pass on to the financial advisers.
This gives our advisers more time to conduct the crucial task of providing bespoke advice without the burden of unnecessary paperwork, ensuring the highest quality recommendations are made to the client.
From April, the free guidance promised by the government should cause an increase in the number of people seeking regulated advice, and it is important that the demand can be handled.
The pension freedoms will create new opportunities for advisers and providers, but preparation will be vital for companies to remain relevant.
Jamie Smith Thompson is managing director of Portal Financial
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