The key advice opportunities of 2018
For intermediaries only
The 16th February marks the start of the Chinese New Year 2018 - ‘Year of the Dog’. In the world of savings and investments, there’s every chance that 2018 could be ‘The Year of the Adviser’. We enter 2018 with a highly uncertain political and economic outlook, a continued heavy regulatory agenda, new FCA rules on Defined Benefit transfers due, an increased interest in the pros and cons of pension freedoms, a raft of changes around 6 April including an increased pension lifetime allowance and social care funding due for consultation. These all mean financial advisers could be this year’s ‘investor’s best friend’. Here’s where I see the key opportunities for advisers to demonstrate their worth like never before.
Defined benefit transfers
It’s estimated that over 6 million people having deferred pensions in defined benefit scheme. In the past few months, most recently with Carillion, we’ve witnessed ongoing issues over the adequacy of some schemes’ funding. This, coupled with super-low gilt yields and no sign of any waning of interest in the new pension freedoms from age 55, means an increasing number of individuals will continue to question whether it makes sense to transfer out, and that’s a decision which can’t be taken lightly.
All eyes will be on the FCA when it responds to last summer’s consultation. I hope the FCA’s new approach will reset and clarify regulatory expectations and give many more advisers regulatory confidence to meet a consumer demand for advice which is only heading in one direction.
Advisers have a hugely important role in helping individuals make appropriate, informed decisions. One additional complication is advising on any potential inheritance tax liability where the individual is in poor health and death occur within two years of transfer. Another may arise if we see moves towards schemes offering partial transfers. It’s hard to envisage any other area that shows just how valuable the role of an adviser is.
The pension freedoms introduced in 2015 have been hugely popular. Those aged 55 and above are showing a strong preference for the flexibility of drawdown over annuities. Annuities can offer a secure income for life, but generally, at a cost of no flexibility once purchased. It doesn’t help that annuity rates look unappealing to many due to low gilt yields and increases in life expectancies.
But with freedom comes responsibility. And not everyone believes individuals are equipped to take on that responsibility all on their own. Both the FCA and the Work and Pensions Select Committee will report back on their concerns in the early months of 2018. The FCA’s Retirement Outcomes Review rightly focussed on the risks to consumers who don’t seek advice before entering drawdown. Without advice, there’s a real risk of running out of money, making poor investment choices, paying too much tax or not managing inheritance.
The FCA isn’t challenging the Government’s decision to offer freedoms, but instead is aiming to introduce additional protections for those who haven’t sought advice. The Select Committee is going a step further and its inquiry challenges the policy itself by considering if freedoms have gone too far. While it would be a brave politician who’d take away aspects of these popular freedoms, the Select Committee’s concerns will no doubt make media headlines. These should further highlight to individuals the risks of going it alone and the benefits of seeking advice.
Policymakers and the pension industry will be on the edge of their seats as they wait to see how employees and employers react to the increase in the auto-enrolment minimum contributions in April. Many schemes already set contributions well above the minimum and their members may be unaffected. But for others, as the minimum from employees trebles from 1% to 3% of band earnings, will we see a spike in opting out or stopping contributions?
Advisers should already be engaging with affected employers to make sure they remain compliant. But there’s a further opportunity here to offer presentations to employees to promote the benefits of remaining in the scheme, and of the employer contribution, which of course can then lead to one to one advice.
As we approach the end of 2018 and employers begin preparing for the next step up in April 2019, there will be a further and greater need to engage. At that point, employers will be increasingly interested in where the Government plans to go next. The Government has announced its intention to move to base pension contributions on earnings from the first £1 and to reduce the minimum qualifying age for auto-enrolment from 22 to 18 from the mid-2020s. Advisers might want to engage with employers to encourage scheme enhancements which move in that direction and create early mover recruitment and retention advantages.
Social care funding
The Government’s long overdue consultation into social care provision and funding is due in the summer, now headed up by the newly retitled Health and Social Care Secretary. An increasing number of us are likely to find part of our retirement is spent in need of social care, making it extremely important that the Government sets out clear rules on how much the state will pay and how much an individual will need to fund from their assets and income. Once the rules are clear, and I very much hope that will include a cap on individual contributions, there are huge opportunities for advisers to help individuals plan ahead. I believe the best and most tax efficient way of doing this is as part of a pension, but there are other options to consider. This is a particularly emotive topic which will generate widespread interest and concern. The complexities, uncertainties and long term nature of the considerations make advice essential.
The Brexit rollercoaster will continue during 2018, accelerating towards the March 2019 exit, and the Government can expect a shaky rather than smooth ride. Investment markets may also prove volatile for some time, again demonstrating the value of investment advice for those seeking to strike an appropriate risk/return balance. And looking ahead to once Brexit is done and dusted, the old chestnuts such as the future of pensions tax relief are bound to reappear making it advisable for higher rate taxpayers to continue to maximise pension contributions while higher rate relief still applies.
Other regulatory change
Unusually, I’m not expecting many brand new initiatives from the Government or regulators while Brexit dominates the agenda and their thinking time. But there’s already a huge amount of change being progressed. Regulatory change has a huge impact on pensions, savings and investment and throws up opportunities to revisit what’s best for clients. April alone will see a long list of changes, each with an associated advice opportunity. For example, the increase in the pension lifetime allowance means those affected will need specialist advice.
Our 2017 Adviser Attitudes survey showed advisers were very optimistic about the opportunities in the years ahead. From this quick look at what to expect in 2018, there’s plenty for advisers to get their teeth into.