Pension freedoms tore up the rulebook when it came to taking pension benefits, causing the industry to question tried and tested strategies which had dominated for decades.
Three years on and the pensions industry is still grappling with the best way to support people who wish to opt for drawdown. But there are two approaches that will dramatically improve the chances of a good outcome – regulated advice and putting the client at the heart of the process.
Ideally, these approaches would be delivered together. But if we focus on putting clients at the heart of the process, while this phrase has been trotted out countless times over the years, when it comes to drawdown it is of increasing importance.
The financial services sector is often guilty of sending reams of paperwork to clients in order to tick the disclosure box.
That’s not good enough. To make a success of drawdown, we need to drive real engagement, not just with those who take advice but also with those that don’t.
We need to find a way of giving people the knowledge and tools to make sound financial decisions that will give them the best chance of making sure their pot lasts the length of retirement, and that their investments are working effectively.
That may sound obvious, but sometimes we lose sight of how complicated drawdown is for clients.
It’s important we put a framework in place for people to make the right decisions based on their personal circumstances.
Regulated advice is the most effective way for people to make the right decisions but we know there are many people who don’t know to seek advice or simply don’t want to take advice.
So how do we ensure these people are making the right decisions? Some believe we should go down the route of default investment propositions.
There are some merits in that argument, particularly for those less financially literate and with smaller pots, but there are clearly concerns as well. One size does not fit all when it comes to drawdown. Everybody’s retirement is different and as soon as we lose sight of that, the risk of poor client outcomes grows.
It might perhaps be better instead if the pensions industry were to learn some lessons from other sectors. Perhaps a five a day style checklist of things to consider when entering or reviewing drawdown, for example?
This would offer broad guidance without dictating how clients should approach drawdown. It should also promote the benefits and protection of regulated advice and point out the risks and pitfalls of going it alone.
For those that take advice, it's all about one thing: review, review, review. There's no better way to keep the client at the centre of the process and deliver on the value of regulated advice.
As a bare minimum, you should be offering a client review once a year – and preferably twice – with investments tracked more frequently.
Cash management should also form a big part of the review process as this paints a clear picture of how a client’s pension pot can meet their retirement needs. Clients have got to understand what cash is going to be coming out of their pots over the next few years to ensure they are suitably de-risked and protected, and not subject to sequencing risk.
Regular reviews also mean clients are better prepared in the event of an unexpected life event that can punch a damaging hole in a client’s pot.
For example, people tend to take more at the beginning of retirement and slowly dial it down as their spending needs reduce. But if you throw in an unexpected life event into the mix, it can change things dramatically.
Regular reviews can lessen the impact of this but it’s also important to note the onus cannot be placed solely on the adviser.
Clients have to know they also need to invest time in telling their adviser about any changes in their circumstances. It doesn’t matter how good someone’s investments are, without a decent level of input from the client that individual is putting themselves at risk.
It’s all about striking the right balance. If clients and advisers can achieve this, then the pitfalls surrounding drawdown can be managed effectively.