Solving the decumulation advice puzzle

The UK Budget highlights the need to solve the advice puzzle for people decumulating their savings, with some welcome ideas of international relevance.

How to organise savings for income in retirement is a critical question facing an increasing number of people in many countries.  It used to be the case that commentary on decumulation focused on the “annuity puzzle” – why people don’t buy what looks on paper to be an economically rational product.  Now there is more understanding of the multiple reasons why that is the case, and Governments, regulators and industry players have increasingly realised they face an advice puzzle: how to help people make their financial choices and manage their money throughout retirement, a task made more difficult where product choices are opaque, financial capability is low and savings pots are small.

Markets are likely to keep designing new products for the decumulation phase but there is no product-based solution suitable for all.  Individual situations vary in ways which affect what the best solution might be. Choosing good options from the available products is not easy. So there is growing awareness of how good financial advice at various points before and during retirement could help, along with a clearer articulation of the problems in accessing good quality and affordable advice.

As the New Zealand government is currently reviewing legislation on the regulation of Financial Advisers, the UK recommendations have particular interest here. Here are some highlights from the UK Budget which could be especially helpful in solving the decumulation advice puzzle, with possible New Zealand equivalents:

  • An advice allowance of £500 able to be withdrawn from a pension pot before age 55 to pay for financial advice. The New Zealand Society of Actuaries (NZSA, their report discussed here) suggested that the equivalent of NZD1,000 would provide a useful level of advice and that KiwiSavers with significant balances could even be nudged or softly compelled towards taking advice, with the option to opt-out.
  • A body with financial capability expertise to develop rules of thumb that people could be nudged into or could access easily. NZSA suggested rules of thumb for how much to draw down from savings would be especially suitable for many people with modest KiwiSaver balances. To avoid confusion it would help to have one “approved” set of rules, kept up to date, consistently accessible from a range of agencies and providers and able to be applied in a range of personal circumstances.
  • Streamlining the government agencies that provide financial information and guidance into a general money advice agency and a pensions guidance body; the latter able to specialise in decumulation. The structure of the UK’s proposed solution may not be relevant elsewhere, insofar as it is a response to UK-specific current issues, but the separation of specialist pensions guidance is worth considering elsewhere given the growing demand for help with decumulation.


Further reading: two reviews which contributed to the UK March 2016 Budget decisions on financial advice. The Financial Advice Market Review report which explored the “supply and demand sides of the market for financial advice and guidance, the barriers to consumers accessing these services and the potential remedies”, and an independent review of the Money Advice Service. The proposed delivery model for publicly funded financial guidance is outlined in this Treasury consultation.



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