The importance of financial advice
Over the years, many of my friends have been in defined benefit (DB) schemes and are now approaching the point at which they need to look at their exit strategy. Indeed, at a lunch after Christmas, one of my close friends spoke to me about how he had chosen his exit date, how his pension consisted of half-defined benefit and half-defined contribution (DC) schemes, how he is hoping to set up a consultancy business, leave the DB scheme until it comes into payment and, if required, dip into his DC scheme when needed alongside his consultancy income.
I often feel that a little bit of financial planning could add some real value to plans like these!
As well as individual complexity, the demographics in 2017 are conspiring to complicate plans and increase the need for financial planning, for example:
- 2017 is the year that a huge number of people will reach the age at which they can draw their pension – 444,000 men and 454,000 women will turn 55 this year.
- State pension ages have risen dramatically in recent years, particularly for women, and recent moves by the Department for Work & Pensions (DWP) suggest that the pace of increase is likely to continue. Currently the state pension age will have moved from 60 for women and 65 for men in 2010, to 66 for both men and women by the autumn of 2020, rising to 67 by 2028. This could change in 2017 when we have the results of John Cridland’s report on the state pension age.
- More people over age 55 are getting divorced.
- More people over age 55 are filing for bankruptcy.
- In living longer many families have older children who would not be dependants and who might like to arrange efficient IHT affairs.
To confound matters even further, the tax issues in pension planning (the lifetime allowance, the annual allowance and the tapered annual allowance) are more complex, as are the tax charges and the mechanism of paying the tax.
I often ask people whether they have a financial adviser and very rarely do I get a ‘yes’. Instead, I get a variety of responses along the lines of: do you know someone good? How much will it cost? Can’t I do it myself?
For me, the problem exists in two areas – perceived affordability and access to advice (i.e. who to choose).
It is quite evident that many people do not understand what financial planning is, the benefits it can bring or how much it should cost. If people don’t understand something then they cannot put a value on it and, as such, they cannot appreciate the cost of good advice.
This is what the Financial Advice Market Review (FAMR) is all about!
The FAMR suggests a number of external initiatives to create a more engaged advice market, such as nudges, information sheets, simplified suitability reports, the ubiquitous ‘pension dashboard’ and even the ability to cash in a small amount of your fund (£500) to pay for advice. In conjunction with this, I think it is also key that advisers showcase the benefits of financial planning – and how much it could cost!
We have had talk of ‘full advice’, ‘focused advice’ and even ‘simplified advice’. Alongside this there is continued work on the subject of ‘guidance’. For me guidance is all well and good (and in this internet-ready world it is easy to read up on a subject) but guidance means taking responsibility for accuracy.
A lot of people do not want guidance, they want answers and many will pay if it comes with expertise, objectivity and professionalism – and if they know where to go!