Where are we heading?

Then on the 30th July 2019, the FCA produced two pension papers that both have implications for those advising on retirement income. That date could be a pivotal date from which the later life advice market began to change. The two papers were:

• CP19 /25 - Pension Transfer Advice; and
• PS19/ 21 - Rule changes following the Retirement Income Review.

The headline from the former is that, except in exceptional circumstances, contingent charging will not be permitted for transfers from Defined Benefit pensions. Contingent charging is where the fee for the advice is only payable if the transfer proceeds. FCA believe this introduces an adviser bias towards recommending a transfer. As it is compulsory to obtain advice if the amount being transferred is more than £30k some argue that without contingent charging, less wealthy individuals will not seek advice even if it may be in their interests to transfer.

To counter this, there are exemptions to the contingent charging ban for those in financial difficulty or with a reduced life expectancy below age 75. The FCA also clarifies its intended rules around the boundaries between guidance and advice on triage services and introduces the concept of abridged advice. This is a truncated advice process that ceases when it becomes clear that a transfer would not be in the best interests of the client.

The main changes arising from the Retirement Income Review are the introduction of default investment pathways for those who wish to crystallise their pension savings without seeking advice and measures to ensure that people do not hold their pension savings in cash other than through a conscious decision.

There is a theme developing in these three papers.

CP 19/17 makes it easier for direct to consumer offerings to exist in the mortgage market. The argument from the FCA is that the current rules are forcing too many to go through complicated advice processes. FCA hope this will enable easier access to mortgages through more direct offerings and comparison websites.

The FCA believe that the MMR changes have pushed too many people into advised mortgages. I can see arguments either way. I will continue to recommend my friends and relatives use a mortgage advisers as they have access to deals that are not generally available. As far as the later life market is concerned a retirement interest-only (RIO) mortgage comes under the scope of these changes. Should they?

When you buy a house, unless you are a cash buyer, you will need a mortgage. It is a one solution product. When you have, or are approaching, retirement the chances are that you are already own your home. The important factor then becomes the reason why you need the mortgage? Closely followed by, how will you meet the interest payments?

Therefore, in later life the mortgage ceases to be a one solution product. The product is being used for a range of solutions. Look at the main reasons people take out equity release plans.

• To pay off a mortgage or other debts;
• To make home improvements;
• To provide financial assistance to family;
• To help finance their retirement; and
• To pay for a holiday or a car.

Equity release is quite rightly a specialised advice market. Before getting to the product other solutions may be more viable. Also, the impacts are far reaching.

This brings us back to the pension papers. Someone in financial difficulty will still be able to transfer their Defined Benefit pension using contingent charging. However, would the use of equity release and leaving the pension as it is be a better solution? Just as there may be reasons for using other assets instead of equity release.

The objective must be to match people to the best solutions for their situation. Default pathways, abridged advice and mortgage comparison websites all have their place for those who do not want to seek or cannot afford advice. Therefore, will they or similar evolve beyond the specific uses identified in these FCA papers?

I worry that the FCA unintentionally in attempting to protect consumers who are unable or unwilling to seek advice, may make more feel they do not need it. Decumulation of holistic wealth in later life is complicated, particularly because every consumer is different, and the wide range of assets they may have.

Later life advisers may need to spend more time promoting the value of the services they offer or even consider offering new services as these proposed changes begin to take hold.