From November, the way we communicate with clients approaching retirement is going to change.
At the moment, a pension provider will write to a client four to six months before their intended retirement date, with a reminder letter about two months before the date.
The aim is to prompt them to consider what they should do with their funds. This is officially called the open market options letter – a hangover from the days before pensions freedoms when clients were being urged to shop around for an annuity – although many of us know it as a “wake-up pack”.
The FCA has been mulling over what to do with wake-up packs for a while. The packs continually come in for criticism for being overly long and cumbersome. For a few years now, the idea of replacing them with a single page summary has been gaining traction.
The regulator has now finally decided on a way forward following the work it carried out as part of its Retirement Outcomes Review. These reforms include making changes regarding both what the packs must include and when they are sent out.
The wake-up packs will stay largely as they are, but from November must also include a single page summary giving all the vital information a client needs when considering their retirement options.
Pension providers will still need to include a factsheet or equivalent information from the Money Advice Service (MAS), and the FCA has promised to work with MAS' successor, currently known as the Single Financial Guidance Body, to update the current factsheet.
Risk warnings and frequency
Another significant change is the inclusion of generic risk warnings.
Currently, non-advised clients are given some specific risk warnings when they take benefits. Yet the FCA is concerned these warnings come too late in the process, only being given once the client has made the decision to take their money.
The regulator believes the warnings should be given as the client is approaching retirement instead, before they have made any decisions.
Under the changes coming in, these generic warnings will be sent to all clients as part of their wake-up pack, whether they are advised or not. The warnings cannot run to more than a single page of A4 when printed.
The frequency of communication is also set to increase.
Instead of making contact just once close to a client's intended retirement date, pension providers will first send reduced information to a client at age 50, and then a full wake-up pack every five years after that until all their uncrystallised pension funds have been used up.
The logic is to inform the client before they reach the decision point on how to spend their pension funds.
There is no doubt the FCA had the unadvised client firmly in its mind when it designed these new rules. In that context, they make perfect sense.
The rules feed into the dialogue around retirement where the conversation starts off early, providers keep making contact and making sure people get the relevant warnings before they decide to access their pension fund.
But because these rules apply across advised and non-advised clients, it could be argued this is overkill for advised clients given they will already by engaged and informed with the retirement planning process.
They too will receive multiple communications from age 50 onwards, including the MAS factsheet and a list of generic warnings. This is regardless of what conversations with their planner have already taken place.
Yet there is an opportunity for advisers and planners to use this information.
You will likely be meeting many of your clients at least yearly, discussing from at least age 50 the possibilities of how to use retirement income.
The new style wake-up packs can feed into these discussions and back up the points you're already flagging with your clients.
Overall, clients are about to start receiving a whole lot more communication around pensions and how to use them to give an income in later life.
We must hope these new rules stay on the right side of not overwhelming clients, but still help them to reach those important retirement decisions in an informed way.