Mamma knows best @PensionsGirlie blog 3.7.18
Mamma knows best
The offspring turned into a teenager last week, just ahead of 6 weeks of free time which he fondly imagines will be spent plugged 24-7 into his PS4. What he doesn’t realise is that the Regulator – me – has its eye on him and will be intervening in his own interests.
The assumption is that with my □□ years on the planet that I know better than him what’s good for him. Most people would certainly think so, and given that he is dependent on his parents for food and lodging the power would seem to be on my side (this won’t stop him arguing obviously, he’s been practicing the teenage bit for a while now).
The question occurs however, does our regulator have the right and the power to stop people from doing as they wish with their own money because it knows better than they do?
Ideologically I believe that people should have choices, and should be able to utilise them without the interference of a higher power, however the FCA’s final Retirement Outcomes paper (intentionally or not) contains some very strong arguments why they should not.
The most persuasive of these, in my view, is that 33% of non-advised drawdown consumers* are holding their entire fund in cash. According to the paper this strategy could result in 37% less income after 20 years by investing in cash in comparison with a mixed asset portfolio. I am not a fan of default investment strategies but it has got to be better than that.
By way of contrast the FCA found that only 6% of advised consumers were wholly invested in “cash and cash-like investment” - suggesting very strongly that people are likely to make better decisions when they take financial advice.
So why do around a third (31%) of consumers who access drawdown do so without taking professional advice? The FCA do not opine on this in their paper, however a recent report for Zurich " Drawdown – is it working for consumers?” does offer some insight. Based on a YouGov survey of 752 drawdown consumers, their report finds that many people do not take advice when entering drawdown because they think it is easy to do it themselves.
When asked why they did not take advice, 52% said they were confident that they knew what they were doing without advice, and 43% think it is simple to manage. This is despite the fact that 32% of those in the sample were first time investors! If ever I saw an illustration of “unconscious incompetence” this is it.
In response to their finding the FCA has come up with a number of ways in which non-advised consumers could be guided towards better retirement outcomes:
The aforementioned default investment pathways
Wake-up packs sent out by providers from age 50, and every 5 years thereafter
The wake-up pack to contain a one-page summary of key facts (‘pensions passport’)
A drawdown comparison tool to support shopping around
Preventing providers from defaulting consumers into cash until they make an investment choice
“Decoupling” PCLS from income so that consumers don’t have to transfer to a drawdown pot if they only want cash
These are all useful suggestions, however if there is one thing that this paper demonstrates very clearly to me – it is that financial advice is a very valuable service and we should be doing everything we can to make it available and affordable to as many people as possible.
At the end of the day I don’t want to be telling the teenager how to live his life for the next 40 years, I would much rather he grew up and did it himself. He will make mistakes, and I will never stop offering help and guidance when it is asked for, but it is his life.
* I wanted to call them NADs but was told the connotations were unfortunate …