Tony Hicks | Head of Sales, Copia Capital | 14 May 2024

For professional advisers only

The Financial Conduct Authority’s (FCA) recent review of retirement income advice makes it pretty clear what their direction of travel is – that advice firms need to reassess their existing retirement strategies, and any plans that leave clients in more accumulation-based portfolios and without a secure income will come under the spotlight.

Despite this, our new research paper ‘Rethinking Retirement: Changing Gear’, in collaboration with the lang cat, has found that just one in five advice firms has intentions to revise their investment approach for clients in retirement this year.

The financial planning landscape has changed almost beyond recognition over the past decade, largely thanks to pension freedoms and auto-enrolment. We’ve seen a fall in the number of defined benefit schemes in favour of defined contribution (DC) schemes. The surge in auto-enrolment in particular has swelled the number of individuals accruing DC pension savings, with an estimated 20.4 million employees now a member of this type of workplace pension scheme*.

There have never been so many options when planning for retirement – or so much complexity. The transition from working and wealth accumulation to decumulation and retirement can often present some of the most daunting financial decisions a person will have to make in their lifetime.

So I was surprised that our new research into retirement advice revealed that only a fifth of advice firms plan to make changes to their decumulation strategies this year. The research was carried out in January and February, just before the FCA published its thematic review of retirement income advice and recommended that advisers take appropriate steps to meet its requirements. In light of the review, it appears that some firms were complacent about their approach and failed to anticipate the regulator’s views on the importance of considering the sustainability of income and the specific risks faced in retirement to avoid clients running out of money too soon.

The FCA has acknowledged that the retirement landscape has changed significantly in the last decade. Now rather than simply thinking about how and when a client should access their retirement income, advisers need to also prepare them for the longer term. They must take into consideration how client circumstances may change throughout retirement and to consider investment risk and longevity risk in decumulation. The FCA highlighted suitability as a major theme and want a client’s attitude to risk and capacity for loss to be investigated in every case.

Our research should act as a wake-up call for the profession, with more firms needing to re-evaluate their decumulation approach to ensure it meets with clients’ ever evolving needs. Only 17% of firms currently employ a dedicated retirement proposition separate from their Centralised Investment Proposition (CIP) and just 3% opt for bespoke portfolios for those transitioning into decumulation. A staggering 80% utilise identical model portfolios for clients in both the accumulation and decumulation phases.

Within the fifth of respondents planning to make a change to their approach, the key reasons were concern over the regulatory direction of travel (73%), changing client attitudes (31%), and the impact of economic fluctuations on investment philosophies (27%).

The role that advisers play in guiding clients through the complex decisions associated with transitioning from wealth accumulation to decumulation is critical. With the introduction of pension freedoms, the decline of defined benefit schemes and the rise of defined contribution schemes and auto-enrolment, the choices available to clients have become more complex.

What’s interesting in the report is that more than half of firms are currently using guaranteed or smoothed investment products with their clients, a third (30%) of firms reported an increase in usage over the past 24 months, while a further quarter haven’t changed but are reviewing their usage.

Additionally, for over a quarter of these firms, integration with their CIP is a key consideration, alongside ensuring client suitability – the overall solution must function operationally as well as delivering the required customer outcome. There is clearly an important role here for DFMs and platforms in designing, building and managing investment solutions that mitigate decumulation risks and meet client objectives, including providing a sustainable income throughout later life.

Advisers need to support their clients in deciding not just how they finance their retirement, but also the level of income to draw and an appropriate investment strategy for funds that remain invested. Echoing the sentiments of the FCA’s thematic review, firms must re-evaluate whether their processes for giving retirement income advice really are best practice.

 That’s why we’ve worked with external experts the lang cat to bring you ‘Rethinking Retirement: Changing Gear’, which takes a fresh look how advisers are building propositions for clients transitioning through retirement and how we can help you.

We’ve also taken to the road in a series of roadshows with Wealthtime, for a series of half day events to talk through the FCA’s thematic review’s findings and what it means for you and your clients. These events are CPD-accredited and led by experts from the lang cat, Just, Wealthtime and Copia, who’ll cover the impact of the FCA’s review on retirement planning now and in the years to come.

Make sure you register today: https://retirement.wealthtime.com/retirement-roadshow-registration.

*Source: Gov.co.uk ‘Workplace pension participation and savings trends of eligible employees: 2009 to 2022’, published 22 November 2023.