When we started the UK Pensions Blog, our research into the new Pension freedoms indicated two pretty clear routes for those seeking to manage their own pensions in retirement. If you know a little about investment and are confident in your own knowledge and ability to manage your own Pension there are a multitude of DIY investment platforms out there – all ready and willing to take your money and provide you with the online functionality to manage it as you desire. Platform charges vary widely depending on which features you consider most important but we have included best buy tables to help you sort the wheat from the chaff.
Conversely, if you are new to investing and need more detailed guidance, there is also what should now be a well established route – start with a call to Pension Wise to arrange a detailed telephone or face to face discussion about your options and to learn about the pooh traps you need to avoid. Then go and see an Independent Financial Adviser (IFA). They will be able to review your situation in detail and provide the regulated advice and investment support that you will need to manage your Pension effectively throughout your retirement. If you don’t know an IFA personally, (and let’s face it, few of us do) we review the comprehensive web sites that point you towards a local IFA. Several of the sites even have detailed consumer reviews of the IFAs, rather like TripAdvisor.
But the simplicity of such a twin track approach has been skewed by the market and recent regulation, such that for many new retirees, advice from an IFA is either not available or is just too expensive. So how has this happened, and what can be done about it?
IFA Remuneration – the old way
IFAs used to get their income from commission payments, paid to them by the companies whose pension products they recommended to their clients – you can see the potential for conflicts of interest already! Much of the commission was hidden, or at the very least opaque to the client, and without doubt some IFAs gave in to the temptation to recommend a product that earned them a higher commission than other, perhaps more suitable products. The IFA industry may protest that not to be the case, but like it or not, any system that allows for even the slightest suspicion that a provider is not working in the best interests of their client is one that needs reform.
IFA Remuneration – the new way
And that is what happened with the Retail Distribution Review (RDR) of 2013 The system of commission payments was swept away and in came a system of fees for advice, in which advisers charged a fee based on the time the advice took to prepare and provide to the client. As part of the RDR, the requirement on IFAs to fully understand the financial situation of their potential clients prior to offering advice was greatly strengthened, meaning that a full review of a potential client’s financial affairs could now take several days work by the IFA, particularly if the affairs were untidy or complex.
The Financial ‘Advice Gap’
And here is where the problem lies, because it takes an IFA roughly the same amount of time to review the affairs of someone with the UK average pension pot of around £69,000 as it does for someone with a £690,000 pension pot. As the cost of that financial review can easily come to £2,500 from some adviser groups it represents a whopping 8% of the smaller pot, making it prohibitively expensive.
This is the ‘advice gap’ – the situation facing not just those with modest pension pots looking for advice, but also those with Defined Benefit/final salary schemes who are seeking to cash in their Pension pots. In certain circumstances the DB provider will demand evidence that the client has received formal advice on the merits of cashing in their DB scheme, before they will release the Pension pot.
A partial solution
So what can be done to resolve this seemingly intractable problem? The furore over the DB advice requirements has led the Government to recognise that there is a problem, and we can only hope that this will be addressed. However, for those with a modest pot seeking advice, then ‘not much’ seems to be the answer.
There is one faint light at the end of the tunnel however, and that is the emergence of fixed price, low cost guidance online. A sort of half way house between the personal service offered by an IFA and the DIY nature of an execution only platform, these are currently only provided by two companies, Hargreaves Lansdown and LV=. This advice is relatively cheap because you fill out all your details in the online application and computers crunch the guidance you are then offered. Crucially, both include a discussion or support from one of their qualified IFAs at the end of the process. At a headline cost of £395 and £199 respectively (both plus VAT), these are perhaps a good option to consider for those with smaller pots who are currently priced out of the market for IFA advice.
Over to You!
Have you experienced problems gaining advice at an affordable price? Or have you tried one of the new intermediate services from Hargreaves or LV=. Do let us know in the comments section below.