On 31 July, the first major phase of the FCA’s Consumer Duty regulatory framework will finally come into force.
Of the standards being set, a key standout is the requirement for firms to avoid causing their clients foreseeable harm. Firms must think ahead to how a product or service they offer might cause their customer harm – including from future use, personal needs, changes to personal circumstances, or a changing environment. As a service intrinsically linked to understanding the future, retirement advice is an area where potential harms could occur. This may result in the need for advisers to reflect on the considerations they take into account when offering such advice.
We’ve partnered with NextWealth to publish the fifth edition of our ‘Managing Lifetime Wealth: retirement planning in the UK’ report, featuring the views of 221 retirement advisers on the trends and developments shaping the retirement advice market.1 In this article, we share some of the results – looking specifically at adviser views on foreseeable harms, as well as how they expect their service to change in response. Unless otherwise stated, all figures are from the report
What foreseeable harms might clients face in retirement?
We asked advisers to identify what they thought were the most significant foreseeable harms facing clients in retirement. The results showed four issues are at the forefront of thinking:
- Inflation reducing spending power during retirement
- Clients running out of money sooner than expected
- Clients having insufficient savings to meet their needs
- Clients making poor decisions on accessing their benefits
Inflation reducing spending power during retirement
58% of advisers consider the impact of inflation on spending power during retirement to be the biggest foreseeable harm facing their clients. Following an unprecedented period of economic disruption, the Consumer Price Index saw UK inflation remain above 10% between August 2022 and March 2023, only recently presenting a slight decrease to 8.7% in the latest figures for April 2023.2 In the face of such high inflation, concerns around spending power continue, as the Government seeks to bring the headline and core rates down to more stable and predictable levels.
For advisers, being able to predict and manage spending power is of great importance, as planning for a client’s later years requires an understanding of what they can afford on a sustainable basis. If inflation continues to be high or erratic, you may face greater difficulty in supporting your clients to avoid this particular harm in retirement.
Clients running out of money sooner than expected, making poor decisions on accessing their benefits
Making sure clients don’t run out of money and avoiding poor decisions on accessing benefits are central to what you deliver for retirement clients. However, we found that advisers also consider them to be two of the biggest causes of foreseeable harm, at 57% and 45% respectively. Our research also highlighted that most advisers (57%) believe the current economic environment is the primary driver of demand for retirement advice.
Considering the relationship between what clients want and what you can do for them, it seems that while economic uncertainty is driving people towards your services, it’s also making it harder for you to support them as effectively as you’d like. Find out what other factors are driving retirement advice in our article, Demand for retirement advice increases.
Clients having insufficient savings to meet their needs
56% of advisers see the possibility of clients having insufficient savings to meet their needs as a top concern in retirement. As people live longer than ever before, the demands of later life are becoming greater and the cost of financing them is growing too. In particular, 42% of advisers highlighted planned future changes to the funding of social care as being a key driver of demand for retirement advice.
With life expectancy expected to rise further, it’s likely you may need to give greater consideration to how clients fund the expected and unexpected requirements of their retirement years.
How will Consumer Duty affect the way you give retirement advice?
The extent to which these and other foreseeable harms will impact retirement advice will continue to evolve as the Consumer Duty beds in. However, based on our findings, it’s likely you’ll require at least some form of change to your advice model and service. We asked advisers how likely they were to alter their retirement advice offering in light of Consumer Duty. Here are the highlights: