Questions over giant’s new plan for ‘non-advised’ investors, writes Jeff Salway
Retirees who don’t want financial advice or can’t afford it are being targeted by pension firms launching new “drawdown” plans in the wake of recent rule changes.
Demand for drawdown contracts, which allow retirees to keep their pension invested and withdraw income when they need it, has surged as annuity sales have plunged. But experts have raised concerns over the number of people entering drawdown without taking advice, with the plans often carrying a complexity that makes them unsuitable for people holding modest pension pots.
The warning was issued as Edinburgh insurance giant Standard Life unveiled a drawdown proposition aimed at non-advised investors who want to keep their pension fund invested in retirement.
The launch comes just over two months after reforms took effect allowing members of defined contribution (DC) schemes to take their pension pots in one go, with no obligation to use their cash for a retirement income. They can take up to a quarter of their pot tax-free, as before, with the remainder charged at their marginal tax rate (rather than the previous 55 per cent).
The changes have already resulted in a dramatic fall in the number of people using their pensions to buy annuities. The Financial Conduct Authority (FCA) has said that annuities bought on the open market still offer better value than drawdown for those with average sized pension pots and who are risk-averse.
But flexible drawdown, allowing people to leave their pension invested and take income from it as and when, is growing rapidly in popularity.
The new product from Edinburgh-based Standard Life, Active Retirement, aims to provide a simplified version of drawdown for customers who don’t use a financial adviser. It offers three different investment “pots” or strategies. The low-risk pot is invested in money market instruments and bonds, the second in absolute return funds (which aim to provide returns while minimising the downside), and the third has more exposure to medium-risk investments (including equities, bonds and property).
Each individual’s allocation is based on information about them and their likely withdrawal patterns and can be reset at any time free of charge.
Jenny Holt, head of investment solutions at Standard Life, said: “We recognise that people will use their retirement savings in a variety of ways and they need help building a portfolio to provide a regular income for the rest of their lives, for a fixed period of time, or to take ad hoc payments as and when needed.”
There are misgivings around the non-advised aspect of the process, however.
Mark Polson, principal at Edinburgh-based consultancy The Lang Cat, welcomed the proposition, which he described as “walking the line between guidance and advice”.
“This is a great product if you’re the provider, as the ‘expert’ guidance service, the product itself and all the investments are within the Standard Life family. Whether it’s right for a client or not depends whether they believe that each part of that chain is appropriate for them,” said Polson.
“As with any ‘guided’ proposition, the test will be when things don’t go well, and clients believe they have been advised on what to do when in fact no advice has been given.”
Standard Life’s product is best suited to people who are “adamant they don’t want advice but still need some help”, according to David Gow, director at Acumen Financial Planning.
“However, there is a difference between someone who does not wish any help at all and the non-advised proposition, which is a service that gives the customer options, and obviously has a cost,” he said. “Many financial planners offer low cost portfolios that together with the inclusion of advice can match or even better the cost of a non-advised service plus product cost.”
While annuities offer a guaranteed income, drawdown carries the threat of investment losses in the event of a market downturn, making it suitable primarily for people comfortable with a degree of risk and sufficient capital to invest.
The risks for investors remain considerable even in plans that are more straightforward than the traditional drawdown approach, said Gregor Munro, financial planner at Johnston Carmichael Wealth.
“Personally I don’t really see why the change in rules in terms of accessibility fundamentally changes the advice process,” he said. “Just because you can do something doesn’t mean you should.”