The pension drawdown market has evolved significantly since the introduction of Pension Freedoms in 2015, and the FCA (Financial Conduct Authority) recently set out some areas for improvement in the ‘Retirement income advice thematic review’ (TR24/1).
While the changes present new challenges that Wealth Managers need to overcome, there are opportunities to remedy these through the innovative use of planning strategies, technology, and adapting practices to meet changing client needs.
Challenges:
- Market Volatilities:
- Weighing up guaranteed income streams against flexible income choices. With higher interest rates and market volatility, annuities are becoming a contender again.
- Balancing the need for income against the preservation of capital, for example, sequencing risk and the long-term impact of negative returns in early retirement.
- Withdrawal Rates:
- Determining a sustainable withdrawal rate and ensuring strategies are constantly monitored to align with market conditions and changing client needs.
- TR24/1 suggested that many firms are either not utilising cashflow modelling tools at all or certainly not consistently, increasing the risk of making inappropriate decisions.
- Regulatory Commitments:
- Navigating and ensuring compliance with evolving FCA rules while providing personalised advice is time-consuming and increases operational costs.
- Client Understanding:
- Meeting the ‘Consumer Understanding’ outcome set by the FCA within Consumer Duty regulations (FG22/5).
- Ensuring clients understand the risks associated with drawdown products whilst maintaining their expectations.
- Technological Integration:
- The increasing complexity of the drawdown market requires sophisticated modelling, tracking, and compliance. Some of the basic and accumulation focussed tools are unable to provide adequate solutions.
- It can also be challenging to incorporate new technologies into well-established advisory practices.
Remedies:
- Suitability Assessments:
- Conduct comprehensive reviews of client financial situations, goals, and risk tolerances.
- Ensuring you have a well-rounded and robust client questionnaire and sophisticated risk profiling tool will help you gather accurate and appropriate information.
- Financial Planning:
- Develop comprehensive plans that account for a wide range of scenarios, including market downturn, longevity risk, and unexpected expenses.
- Withdrawal Strategies:
- Instead of static withdrawal rules, advisers should consider dynamic strategies to adjust withdrawals based on portfolio performance and life expectancy.
- Consider a mixture of flexible and guaranteed income products.
- Advisers can struggle to understand all the guaranteed products coming to market, and therefore, it is important to research and compare the appropriate solutions.
- Client Communication:
- Provide clear explanations and regular updates to help clients manage their expectations and understand the risks and rewards of drawdown.
- Technology Solutions:
- Invest in advanced technology that can simplify operations and ensure regulatory compliance.
- Ensure the technology within your ecosystem can support the advice given.
While this list of remedies is not exhaustive, we have delivered some. Our specialist consultant team works across the entire spectrum of financial services firms (asset and wealth managers, private banks, pension funds, insurers, trust and fiduciaries, FinTechs, financial advisories and service providers) to improve productivity, deliver complex transformation, fortify reputations, enable growth and protect value.
Tailored to your unique needs, whether advisory, delivery, managed services or interim resourcing, our capabilities can be delivered on a bespoke basis, holistically or using a modular approach.
