FCA recommences review into retirement income advice

The FCA has announced that it is undertaking a thematic review assessing the advice consumers are receiving on meeting their income needs in retirement.

The review will explore how financial adviser firms are delivering retirement income advice and assess the quality of outcomes consumers are getting.

Previously planned work on this topic was paused during the Covid-19 pandemic. The new review will examine how the retirement income advice market is functioning and how firms are responding to changing consumer needs as a result of the rising cost of living.

The FCA will also link the review to the lifetime mortgages work it committed to in its 2022/23 Business Plan, adding that the results will also be an important indicator of how firms are implementing the Consumer Duty.

The regulator will begin its review in Q1 2023 and aims to publish a report setting out its findings in Q4 2023.

In a statement, the FCA said: "The introduction of the Government’s pension freedom reforms has changed the way consumers access their retirement savings. Given the wider range of retirement options available, it is vital that consumers get good advice at the point they first access their pension savings and, where relevant, on an ongoing basis.

"Since 2015, there has been a significant shift to consumers drawing an income from pension funds which remain invested. Advice in this area can be complex, so it is important firms understand the needs of their consumers and ensure their advisory solutions deliver consistently suitable advice."

Steven Cameron, pensions director at Aegon, commented: “After a pause for the pandemic, the FCA has announced it is recommencing its thematic review into retirement income advice, although with little detail on scope. The timing now overlaps with an intense period of preparing for the new Consumer Duty which is likely to lead to some changes in adviser retirement advice propositions.

“Retirement advice is central to many adviser businesses and is one of the most complex – as well as valuable - areas of financial planning. Advisers need to help their clients navigate many uncertainties including future and varying income requirements, short and long term investment returns, inflationary trends and of course how long clients might live. In new Consumer Duty terms, this presents many foreseeable harms which advisers will be considering as part of delivering good outcomes. Some such as running out of money too soon, or taking less income than is sustainable, can be in conflict.

“While preparing for the new Consumer Duty, we expect many adviser firms will be reviewing their retirement income advice propositions and we hope the thematic review will allow for these. While it may be difficult to completely avoid all potential foreseeable harms, we expect advisers will be making all of these clear to clients so they can agree which need avoided as priority.“

Jon Greer, head of retirement policy at Quilter, added: "Pension freedoms radically changed the retirement landscape and have no doubt been instrumental in helping to give people more choice and flexibility in retirement. But with greater choice, comes more complexity and its right that this Thematic Review announced by the FCA looks at how financial advice is helping consumers navigate these difficult and often perilous decisions.

"Planning your retirement is one of the most important decisions of your lifetime and financial advisers have a hugely important role to play in helping people make the best of their pension savings and ultimately accessing the best possible retirement. Making the wrong choice could make the difference between someone enjoying a fulfilling retirement and one where they are struggling to make ends meet.

"While new initiatives such as investment pathways make it easier for unadvised savers to choose investment solutions aligned to their specific desires and drawdown objectives, they are no substitute for financial advice. Everyone’s financial make up is different as well as their financial objectives, and advice often helps those who live well below their means for much of their retirement unnecessarily by illustrating exactly how much they can afford to drawdown without fear of running out.

"The results of the review from the FCA will also be a bellwether for how well firms are implementing Consumer Duty as the new regulation requires advice to be outcome-based and avoid foreseeable harm. Advisers will no doubt have an eye on how they document their advice and the solutions they use through the consumer duty lens with particular emphasis on protecting their customers from foreseeable harm.

"However, the government must also look at some of the other aspects of the pension system to see if they are working as they should too. The Money Purchase Annual Allowance, for example, is a contradiction to the principles of freedom and flexibility and government should consider whether it is achieving the desired outcome and explore whether a general anti-abuse approach could work better than the rigid, strict approach currently employed."