RDR is a big topic for the papers, I can easily get hung up around what they say and how it doesn’t seem to paint a full picture, or I could focus on the challenges we are facing.
I am in favour of RDR as a concept; however the real underlying problem is that of getting people to engage with their money. Whether this is through an adviser, or whether going direct and doing it yourself. In the next two blogs I want to explore firstly the changing face of retirement and then I want to look at the Gender Directive for Pensions and Annuities.
One area I keep focusing on is financial education. Some of us may be lucky and have what was called a final salary pension scheme. This effectively provided us with a guaranteed pension based on the years of service we did and the earnings we received. So say I was earning £10,000 when I retired and worked for 40 years I might get 50% of that as a pension for life.
The responsibility for that rested with the employer, and in some cases still does. The problem is that these schemes are too expensive to run. There are a number of factors behind this but life expectancy has to be a crucial element to this. We are living longer and it means to provide any guaranteed income in retirement is expensive for the employer.
So we are now seeing a shift to a position where the individual and not the company takes responsibility for ensuring they have sufficient income in retirement. The problem you have as is highlighted by many articles on RDR is that those just starting out are being priced out of the advised market. So what I mean is someone wanting to get advice on where to start has no-one to turn to.
This heightens a growing fear about what will happen when we reach retirement. Not immediately but for many who spend years saving to buy a house, then having children and then eventually considering retirement feel they are too late to do anything and can find no-one to help.
A recent survey indicated that 67% of those surveyed felt that their workplace pension was central to providing their income in retirement. However, longevity, low interest rates and other factors have driven down annuity rates so we need to save more to get what we want. In fact this survey indicates that very few individuals expect to use non-retirement plan assets to fund retirement.
So we are starting to get a divide where people are still holding onto the idea that the employer will provide when in reality the individual needs to accept this responsibility.
We have seen auto-enrolment and NEST. I did a lot of research into this and perhaps it has changed but there were a number of areas that concerned me. Firstly the funds were limited to one provider and a smaller number of tracker funds, secondly the pension was not portable, thirdly the contribution limits had a ceiling and finally there was no advice.
Where is this leading we are coming into a generation of new retirement saving, which includes volatility in the world of investments, no risk-free investments and now limited access to advice. The crucial point is that young people are not engaging with retirement planning because they have other priorities and actually by not engaging this will have a huge impact on the type of retirement they can expect to enjoy.
Whilst journalists have a field day at how nasty financial advisers are they are missing a time bomb. The need to help individuals in financial planning and in fact a responsibility to take this on; we live in a new era which people have not accepted. RDR is good for a number of reasons, it fully discloses fees and it makes a more professional industry however there is a danger that it provides no scope to give advice or information to those starting out who really need it.
And of course providing in retirement is not just about using a pension, you could have a buy-to-let property, you could use tax free income from an ISA, you could use CGT allowances etc.
So where do we go – I am convinced that someone will develop a structure to provide low end advice, however we also need to develop an un-bias information portal which provides all forms of financial education from basic budgeting to goal setting. Journalists and other interested parties should help to promote this and together we can start to fill the gap that is being left.