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How to confuse consumers and advisers

14th Jul 2014

From April this year the FCA made it a requirement that all pre-retirement illustrations, i.e. those provided while a consumer is saving for retirement, must be presented on an inflation adjusted basis.  This means that the illustrations would sometimes show that after years of savings an investor gets back little more (or even less) than they put in.  This is not helpful when millions are joining pension arrangements for the first time and need to understand that they need to save more than the minimum to enjoy a decent retirement.


Thankfully, the FCA did not make it compulsory to apply the same type of inflation adjustment for drawdown illustrations provided at the point of retirement.  However, they did make it an option for illustrations to be provided on this basis and a small number of providers have chosen to do so.  This must be incredibly confusing for an adviser trying to compare products.  


Discussion as to how best to illustrate the advantages of drawdown has become much more important following the announcements in the budget.  It is very important for investors not just to understand the difference between taking an annuity and leaving a fund invested in drawdown, but also to be able to compare a drawdown investment with a transfer to an ISA or, as many people are likely to do, with a building society investment.


Complex comparisons would become even more opaque if they had to be done on an inflation adjusted basis.  Particularly as it is only the pension investment products for which there is any requirement to make such an adjustment.  Someone would find it very confusing if having asked for an income of £5,000 a year as a guaranteed income they should be presented with an illustration showing that it would pay £5,000 in year 1, £4,878 in year 2 and £4,759 in year 3.  It would be interesting to see how building societies would like to present the effects of leaving money in accounts with today’s low rates of interest if they had to make projections allowing for future inflation.


So it is to be hoped that the FCA does not make further changes to the drawdown rules at a time when the industry is trying to find ways to demonstrate the new flexibilities at retirement that were a welcome announcement from the government.

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