On April 7th, the Financial Conduct Authority (FCA) confirmed its review of pension freedoms advice. Adviser Points of View managed to catch up with Victoria Hicks, director of the City& Capital to discuss why she believes this reform is overdue.
Since the Taxation of Pensions Act 2014 bringing about pension freedoms, typically those invested have seen positive returns, clients have been drawing down on pensions to support retirement, and where advice has been sought these withdrawals have tended to be sustainable. In a rising market, it is easy to forget how uncertain the global markets can be.
Now that the global markets are showing significant falls, savers have been left more vulnerable. There is a great deal of psychology behind investing and the fear of loss far outweighs the pleasure of the gains.
When you see a value falling, and you lack a true understanding of the investment markets, it can feel like the right decision to dis-invest, but history has shown us that missing just a few days of significant growth, which happens during times of such volatility, can make it sometimes impossible to reverse the losses.
Therefore, my fear is not so much with those savers who have advisers, but the ones who do not and therefore we need to see further promotion of services like Pension Wise to provide the education that people need. We also need to see the providers, where clients go direct, guiding clients and educating them about the timing of making such lasting decisions.
The guidance right now must be, where you can wait to take a withdrawal or wait to access your pension, then do so. Pensions should not be switched or transferred, advice matters like this, if they are right, will still be right in a few months. Clients should be educated on drawdown too. A fall in fund values, compounded by drawdowns for income, are where savers can really diminish their retirement pots.
Again, those with advisers, will likely have a balance in cash to draw from when markets get choppy. They may have experienced cash flow modelling with their advisers to stress test their portfolios against such falls – again this provides education and reassurance.
For those who do not have the luxury of such advice they should be speaking to Pension Wise, and assessing not just their pensions as their retirement income, but also other assets they may have, especially cash, that they can use during this period.
To reduce outflows at this time, will mean more funds are retained, and as markets recover there lies greater potential for recovery.
In summary, I would say the effects of Covid-19 could rumble on for years where savers make rash decisions now or where they fall foul to that scam that reaches them at their most vulnerable, by offering high levels of return.
We must pull together in the form of guidance and ensure that where savers are making decisions, they have been educated first. Whilst advisers are doing their bit, they only work with a relatively small percentage of pension savers, and therefore initially this falls upon the product providers as the first port-of-call for worried clients.