Can You Afford Not to Take Pension Advice?

When faced with a broken boiler, the majority of consumers would call a heating engineer to fix the problem, rather than attempt to fix the issue themselves.

The majority of consumers will readily admit to possessing very little knowledge about the intricacies of a home boiler system. However, if consumers are so quick to seek professional help in this context, why don’t they give their retirement finances the same treatment?

Going it alone

The refusal of retirees to seek pension advice is not uncommon. Indeed, figures from the Financial Conduct Authority (FCA) show that each year 100,000 consumers over the age of 55 go into income drawdown without seeking financial advice; and that just relates to a single pension product.

Income drawdown is a retirement option that enables consumers to leave their pension pot invested, whilst still being able to withdraw income from it when needed. This might seem like a sensible option; and it might be for some. However, retirement finance is never a case of one-size-fits-all.

Choosing a retirement finance option without seeking financial advice could leave people’s retirement savings in investments or structures that do not suit their financial needs. Indeed, this could leave retirees out of pocket in the long term.

The myths about advice

Unfortunately, many consumers firmly hold on to incorrect assumptions about financial advice. Indeed, recent research from Aegon revealed that two fifths (40%) of consumers feel they are capable of making financial decisions themselves, while a third (33%) believe financial advice is too expensive.

Consequently, some consumers decide to conduct their own research and purchase retirement products via a broker. For those with a basic grasp of pension products, this might seem cost-effective. However, this is not always the case.

The cost of non-advised routes

Taking the non-advised route to retirement can result in a large bill for consumers; which could outweigh the cost of independent financial advice.

A recent article in The Times revealed that many consumers are purchasing annuities – products purchased with a pension pot, which offer a monthly income for the rest of a retiree’s life (or for a specified time agreed with the annuity lender) – from big insurers via brokers, rather than seeking independent financial advice.

These brokers can receive a large commission of over 3% from these sales; the cost of which is imposed on the client. This price is only disclosed to the client just before the purchase of the annuity – however, the cost itself could be more expensive than the price of independent financial advice.

As stated in The Times’ article: “Why would anyone get an annuity quote from a non-advised broker who deducts more than 3% in commission charges when they can get proper financial advice and pay an advice fee which is considerably less?”

A welcome safety-net

There is another pertinent reason for avoiding the non-advised route: unbeknown to some consumers, seeking regulated financial advice essentially safeguards their financial position.

If the adviser recommended that their client choose a retirement income option which ultimately left them worse off, the adviser must ensure that the client’s original financial position is restored. If a consumer made an ill-advised decision without seeking regulated financial advice, they would not receive the same guarantee.

Retirement finances can be complicated. Even if one were to grasp a basic understanding of various retirement finance products, it is simply not worth the risk of overlooking financial advice.

To return to the original analogy of the broken boiler; watching a couple of YouTube videos about how to fix it will not make someone a heating engineer. Similarly, a Google search of retirement finance products will not make someone a qualified financial adviser.

Consumers should not risk making a detrimental financial decision via the non-advised route. Instead, the best path to a financially secure retirement is via an independent financial adviser; and this comes at a generally inconsequential cost.