Extra support will be available for employee savers under proposals to change the rules on pension advice and guidance.
The Financial Conduct Authority (FCA) has proposed that providers and other firms will be allowed to offer support on pensions decisions in certain scenarios, called ‘targeted support’.
Currently, offering pensions advice in the UK is strictly regulated and must meet certain requirements to ensure savers receive appropriate and unbiased information.
However, as the pension market has changed over the years, there has been much debate about how to ensure people can make the most of their pension savings, and concerns about an ‘advice gap’ have become more prominent.
This is partly due to the fact that more than 16 million people in the UK save into a defined contribution pension scheme, which has put more responsibility onto savers to make complex financial decisions.
Knowledge and engagement gap
A gap exists between bespoke paid-for financial advice and free broad-brush guidance. Currently, guidance information is available free via MoneyHelper and is also shared by providers and employers.
But the regulator’s Financial Lives survey 2024 found that pension engagement and understanding is low. It said that the vast majority of consumers are ill-equipped to manage complex pension decisions confidently as only 9 percent of adults have taken full regulated advice in the last 12 months.
Further FCA survey data showed that 75 percent of consumers over 45 do not have a clear plan for how to take money from their pension or didn’t know they had to make a choice.
These issues have led to the ‘targeted support’ proposals, which are part of a wider review of the boundary between financial advice and guidance.
‘Targeted support’ proposals would allow providers to offer support in different scenarios. For example, if a pension saver is drawing down on their pension in an unsustainable way, or if a saver was uncertain about how to take a retirement income, firms would be able to provide a bespoke suggestion to specific groups of consumers who share the same characteristics. The FCA has suggested this targeted support is provided free.
However, it is unclear where the liability for poor advice would lie. Currently, professionals that offer paid-for pension advice need professional indemnity cover in the event that advice they have given leads to a worse outcome for savers.
More proposals to come
The regulator said it will share more proposals on introducing concepts of targeted support and simplified advice for other retail investments next year.
With such significant reforms in the pipeline, the regulator has called for feedback from all stakeholders about the proposals by mid-February 2025.
Sarah Pritchard, executive director of consumers, competition and international, at the FCA, said: “We want people to have access to the help, guidance and advice that they need, at a cost they can afford, when they need it, so that they can make informed decisions. So, we are reviewing the boundary between guidance and advice across investments.
“We know people find pensions particularly difficult to understand, so we are deliberately starting with this to help consumers with their pension decisions.
“If we get this right, consumers will be better supported in making financial decisions. This will potentially lead to more people investing which will help provide capital necessary to stimulate economic growth.”
Steve Watson, NatWest Cushon head of research and policy, said: “It’s fantastic to see the FCA moving at pace to help more people achieve the retirement outcomes they deserve. This is really excellent news and could be revolutionary for pensions; if executed properly this could help so many people enjoy better retirements. Pensions are complicated and the more help people can get the better.
“On the flip side this does have consequences in the trust-based pensions world. Many trustees will be concerned that offering any form of tailored support could entail regulatory risks, particularly if they are signposting products and potentially straying into regulated financial advice.
“There’s a unique opportunity for the FCA and The Pensions Regulator (TPR) to work together to ensure trustees can be comfortable with the help they can offer. TPR in particular will be a crucial cog to make sure these rules are applicable in reality and that people do get the guidance they need.
“It’s crucial members can get access to better support with their pensions, regardless of the product they’re in and the complex issues they’re facing. The regulators need to work with the industry to make sure the final rules allow trustees to offer the necessary support to members.”
Ongoing regulatory conversation
The FCA is also seeking views on whether there are any other specific areas of its regulatory framework which may need to change to enable firms to better support consumers.
Via a separate discussion paper the FCA is seeking views on whether further changes might be needed to better support consumers such as the use of digital tools, consolidation of pension pots and the rules around Self-Invested Personal Pensions (SIPPs).
Stephen Lowe, group communications director at retirement specialist Just Group, said: “The latest data from the FCA shows that only four in 10 pensions accessed in 2023/24 were taken with the help of regulated advice or guidance so it is clear that further interventions are necessary in order to help more people get support when first deciding how to use their pensions.
“This is a once-in-a-decade opportunity and its critical everyone across the industry gets behind this theme for the benefit of savers. Closing the advice gap by a meaningful amount is realistically likely to be a multi-year project. Targeted support could be a game changer and it’s the service that has generated most optimism.
“In addition, we would also like to see further steps to make the use of the government’s free independent and impartial guidance service, Pension Wise, ‘the norm’ so that it becomes a natural step before first accessing pension cash.”
