The FCA's Great Retirement Advice Shake-Up: Are Your Ducks in a Row?

An increased focus on retirement advice by the FCA means that financial advisors must be prepared for these conversations with clients. The FCA’s thematic review of retirement income advice means increased scrutiny for advisors, as the direction shifts from pension planning to a more holistic approach.

Changing the shape of retirement planning advice to reflect the current landscape

The FCA conducted its review in light of the UK’s changing retirement landscape, with increasing life expectancy, new retirement patterns, and more flexible ways to access pensions impacting later life.

The review found that:

– Firms didn’t always consider different client needs in decumulation compared with accumulation
– Advice models weren’t always likely to lead to consistent, favourable outcomes
– Clients were not always given the right information to support them in making informed decisions
– Vulnerable customer processes were not always implemented.

It also highlighted a number of concerns, with IFA Magazine reporting data accuracy rates as low as 33% among some firms. With this in mind, the FCA has highlighted a number of areas for improvement, including an income withdrawal strategy, in-depth risk profiling, advice suitability, and regular reviews.

Where previously conversations about retirement pivoted around pensions, modern living – along with the FCA’s increased scrutiny – means that these conversations now need to be much wider. The crux is this: you need to ensure you’re giving robust, holistic advice, keep meticulous records, and communicate risks coherently to your clients.

Retirement living plays a key role in your later-life planning conversations

A significant part of this is having a defined process to follow to make sure your clients are presented with the full range of choices for retirement living and understand the specific benefits and drawbacks.

This will also likely be more than one conversation, as your clients’ needs will evolve throughout their 70s, 80s, and 90s. As well as simply helping them find ways to save for retirement, you’ll also need to explore their decumulation options and potential long-term care costs.

Vulnerabilities are also likely to increase as your clients age, including cognitive decline, mobility issues, ill health, and bereavement.

While remaining in their main residence may be perfectly feasible during the early part of their retirement, these vulnerabilities may make it more pragmatic to consider alternative retirement living options.

Costs such as in-house adaptations and care can become prohibitively expensive. If your clients need to move house, downsizing has traditionally been the suggested option. However, current thinking has shifted towards “rightsizing”.

Essentially, rather than just suggesting they reduce the size of their dwelling, you can work strategically with your clients to find a bespoke living arrangement that meets several of their needs.

In our earlier article, we discussed the many wellbeing benefits associated with IRCs. There are also a number of significant financial advantages to retirement living.

Having on-site access to the support they need without moving into a care home or living in isolation with expensive home-care, is key.

The little-known Inheritance Tax benefit of retirement living models could reduce your clients’ liability

Another substantial – and often-overlooked – financial benefit of IRCs lies in your estate planning conversations.

Many IRC models, including Riverstone Living, operate on a “deferred fee” basis. This means that when a resident sells their property or on their death, a percentage of the sale price is paid back to Riverstone to cover communal upkeep, infrastructure, and facilities maintenance.

This model can sometimes alarm your clients and their families. To them, it can feel like money is being taken from their estate. It falls to you to explain the Inheritance Tax (IHT) value of such a proposition.

This system varies across IRCs. Occupants usually pay a lower upfront cost, and the deferred fee – deducted on resale – can be up to 35% of the property’s value. This can significantly reduce wealth entering your clients’ estates, reducing their value for IHT purposes.

Doing further planning around this can, in some cases, actually strengthen their financial position, enabling gifting and greater wealth being passed onto their beneficiaries.

The FCA has declared that retirement income advice will remain an ongoing focus, further exploring the scale of the issues identified.

This means that advisors will need to continue adapting and evolving, discuss the wider issues of later-life planning with their clients, and recognise that IRCs form a crucial part of these conversations.

To find out more see: https://www.riverstoneliving.com/advisors