FOR ADVISERS ONLY
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The COVID-19 pandemic has and continues to bring many challenges to financial advisers and their clients. Initially, concerns concentrated on volatile investment markets and their impact on clients’ financial planning.
Further long term issues are expected following the end of the Coronavirus Job Retention Scheme and furloughing in October. This will likely bring increases in unemployment and falls in people’s disposable incomes as taxes rise to pay for the cost of dealing with the pandemic.
In these unsettling times, clients are increasingly reviewing their financial plans. Many may have chosen to delay retirement due to no longer having sufficient funds or be concerned about the sustainability of their income. Others may be looking to tap into their pension and drawdown plans to help them make ends meet in the short term.
It's clear there's a strong demand for financial advice as people look to maximise their retirement income and this is evident in the sharp increase in adviser usage of our tools and reports which model income sustainability.
We've also seen the number of transfers or switches from one drawdown provider to another increase. This process is called ‘transfer in drawdown’. This trend's partly driven by growth in the overall number of drawdown policies following Pension Freedoms regulation in 2015, but other factors are also at play which we'll discuss in more detail.
The customer request to first take income from their drawdown plan triggers the adviser to consider whether the current provider remains the most suitable, as taking income fundamentally changes how the plan is being used.
For instance, many clients will have previously taken their tax-free cash (at say age 55) and later on (at say age 60) want to start taking an income. Their chosen investment strategy may have been appropriate while the customer is in accumulation, but does it remain appropriate when they start decumulating?
While some drawdown providers offer investment strategies targeted for the decumulation stage, there are others who don’t and the client risks finding themselves in a plan or investment strategy that doesn't meet their current needs. An adviser can look at whether their current plan and investment strategy remains suitable and make any necessary changes.
The suitability review referred to above also provides the opportunity to review whether the level of income the client wishes to take is actually sustainable over the long term.
The biggest fear for drawdown clients is running out of money in retirement. While some would be able to plug the gap by returning to work for a period of time for instance, for others that's not feasible.
So it's important to have a conversation about what the client expects from their retirement income, what other assets they could fall back on and whether their expectations match up to reality. Making regular checks that the chosen level of income remains robust over the long term will bring your client valuable peace of mind and limit the potential for nasty shocks.
The market falls and low return environment has increased focus on the performance versus risk versus cost of drawdown providers. Good performance may have been achieved through taking a high risk investment strategy, but is this really what customers want?
The level of risk needs to match the customer's capacity for loss on the plan. As life expectancy increases, the impact of charges becomes more material to customers and so it's important to check whether the costs of the clients’ drawdown plan still stack up.
The early weeks of the pandemic also had a huge effect on the level of service some providers were able to offer. While the situation has settled down since, advisers and their clients will increasingly opt for those who can meet their needs and continue to provide a good level of service through good, bad and challenging times.
Another important consideration when considering a switch of provider is product flexibility. With many clients looking for ways to pass on their wealth to younger generations upon death, advisers are increasingly aware that many older style drawdown arrangements don't offer full flexibility in relation to beneficiary drawdown.
These restrictions limit the options available to the beneficiary and to the adviser who's often advising the beneficiary for the first time. For pre-retirement clients, advisers are incorporating beneficiary drawdown functionality in their initial retirement advice. For clients in drawdown, advisers are increasingly recommending transfers in drawdown to more flexible plans which offer a greater range of options.
An adviser can advise the client whether their current plan supports the full range of drawdown death benefit options now available, including nominee and successor drawdown. It also provides an opportunity for the adviser to get to know and start building a relationship with the beneficiaries, potentially as current or future clients.
And finally there's growing compliance and regulatory pressure on reviewing providers as customers move into drawdown and take income.
The FCA’s Retirement Outcomes Review sought to improve transparency and disclosure to drawdown customers. The review was primarily concerned with the non-advised drawdown market, citing weak competitive pressure and low levels of switching. 94% of non-advised customers took out a drawdown plan with their existing provider compared to just 35% of advised clients.
The review also requires non-advised drawdown providers to remind customers annually of their chosen investment pathway and their ability to switch both product and pathway. Furthermore, we note that the FCA's currently carrying out a review of the suitability of retirement income advice.
Bankhall’s head of advice oversight John Higginbottom agrees we'll continue to see more transfers in drawdown. He said: “Ongoing suitability, risks and costs have been the bedrock of the ongoing service consideration for flexi access drawdown since drawdown came into effect in 1997. However, providers have been challenged by the retirement outcome review, along with recent FCA work on defined benefit and the advice suitability review. The combination of these factors is highlighting among other things the impact of costs and evidencing how these benefit the client. This cements the need to ensure that these factors are carefully considered and the outcome for the client is appropriate, whether this means staying in flexi access drawdown or considering other solutions.”
He added: “Ultimately, if costs can be reduced to clearly benefit the client then it’s potentially an easy win in helping to demonstrate value, along with other elements of the service.”
The growth in transfers in drawdown recommendations by financial advisers is positive for the industry. For customers, it demonstrates advisers are continually reviewing their needs and recommending providers which offer quality and value for money. For regulators, it demonstrates a competitive market working for customers. For advisers, it creates an opportunity to earn new fee income while creating value for customers at a time when new monies are more limited.
Transfers in drawdown provide the perfect opportunity as they're not new monies, but involve existing monies already in the pension system moving from one provider to another. Such a shift will also affect providers who'll be challenged to raise their game and improve the quality, flexibility and pricing of their drawdown propositions.
As more customers use drawdown policies in retirement, transfers in drawdown are destined to emerge as a significant theme for the industry for decades to come.
Distribution Director
Tom is responsible for Royal London Intermediary distribution of protection, individual pensions and workplace pensions. He was previously Group Strategy Director at Royal London. Before Royal London, Tom was a Partner at NMG Consulting where he provided strategy advice on where to play and how to compete to insurers, platforms and asset managers in the UK and international markets. Tom holds a first class degree in Chemistry from Oxford.