A third (34%) of the 62,000 people who accessed the pension freedoms between April and September 2018 did so without a financial adviser, research from the Association of British Insurers (ABI) has found.
That equates to 21,000 people.
The average amount withdrawn by this group was £120,000 ($152,617, €135,226).
The sum was described by the ABI as a “record-average pot”, and nearly double the amount that was withdrawn by the same cohort in early 2016.
Steven Cameron, pensions director at Aegon, told International Adviser: “The pension freedoms represent a double edged sword as, on the one hand, people have many more options as to how they access their money, but on the other they face potentially complex decisions about how best to do so as well as ongoing decisions about retirement income and investments.
“It’s very likely that many of those who have accessed their savings without advice would have benefited from doing so.
“We hear of many examples of people accessing pension cash and simply leaving it in a bank account where they have then lost the tax advantages of a pension and the prospects for investment growth.”
‘False economy’ misleading retirees
Neil Jones, wealth and tax specialist at Canada Life, told IA that people entering retirement should not be tricked by the cost of financial advice.
“It’s deeply concerning that even those with an average sized pot aren’t seeking professional advice.
“Potentially there’s a false economy at work here – a belief that the cost of advice is too high to make it worthwhile. But even a back of the envelope calculations will show that, over 20 years, a small improvement in the pension funds is going to far outweigh the cost.
“And, to be clear, many of the improvements a great adviser can make aren’t small.
“When people access their pension, buy an annuity, or look to drawdown, they really would benefit in the long run from seeing an adviser. It may seem straightforward, but the opportunities are not obvious.
“To take one example, too many people drawdown their whole pension and just keep the proceeds as cash – ultimately losing the tax advantages, actually paying tax and gaining new risks in the process.”
Low engagement needs to be tackled
In addition to the reasons above, Tom Selby, senior analyst at investment platform AJ Bell, told IA that low engagement with the financial services could be another contributing factor.
“There are all sorts of reasons people start taking an income in retirement without receiving regulated financial advice. In some cases, savers will be put off for paying for advice, even though in most circumstances it represents value for money.
“Others will actively shun advice because they feel equipped to manage their portfolio themselves, while there are also people with smaller funds for whom financial advice is less likely to be suitable. Finally, low levels of engagement with financial services in general and pensions in particular means the majority probably don’t even consider speaking to an adviser.
“There is no doubt taking advice would benefit a large proportion of these people but getting a reluctant and disengaged public to make that leap is no easy task. The government and the Financial Conduct Authority are probably best placed to encourage advice uptake, and things like advertising campaigns promoting the value of advice or better retirement communications could help.
“A more radical intervention could see savers provided with advice vouchers to help address the cost barrier, although clearly this would require significant ongoing funds. The development of lower cost ‘robo’ solutions could also help make advice more attractive to the average saver.”
What’s at stake?
From losing tax incentives, to just having their pots stagnate in a bank account, retirees need to take into consideration all the consequences of going into drawdown, and that is something a financial adviser would be able to help with.
Cameron believes that any form of financial advice is better than none: “While guidance services like the Money & Pension Service can provide generic information on how to approach decisions about retirement income, if people want a personalised recommendation they will need to take financial advice and guidance bodies need to make this clear.
“There’s potentially a role for employers here who are a trusted source of information on pensions and can explain the value of advice in the workplace.”
Selby added that accessing pension freedoms without any form of guidance could see people struggle financially later on in their retirement.
“The risk of not taking advice in retirement is that you are more likely to make sub-optimal decisions,” he said.
“This could be anything from buying the wrong product, investing inappropriately (for example by taking too much risk) or withdrawing too much, too soon from your retirement fund. Anyone who does this, risks running out of money early and potentially facing financial hardship in later years.”
