MSE Blog: Do you know the difference between pensions guidance and advice?

Former_MSE_Helen

"If you’re retiring this year and planning on taking your pension post-April when the new pension freedoms come into force (or even if you’re not), it’s crucial that you understand the difference between guidance and advice..."

Read MSE Amy's full blog:
When talking pensions, do you know the difference between guidance and advice?


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atush

Yes. I know the difference.

SnowMan

MSE_Amy wrote:

Do you know the difference between pensions guidance and advice?

Yes I know the difference

MSE_Amy wrote:

The distinction between the two words and their meaning is especially confusing when you consider that consumers will be offered this guidance by organisations such as Citizens Advice – which in the regulatory sense, cannot actually give advice when it comes to pensions, just guidance. You can see how there could be some confusion.

So do you know if the pensions articles on the MSE website are guidance or advice? Given by the posts on this forum that start ‘Martin advised me’ clearly there is plenty of confusion on this.

The distinction between the two words and their meaning is especially confusing when you consider that the website is named moneysavingexpert. The word expert suggests it must be advice. But the MSE articles including those on pensions such as the cheapest SIPP article, in the regulatory sense, cannot actually be advice when it comes to pensions, just guidance. You can see how there could be some confusion.


The important thing about an MSE article's guidance or the guidance provided by TPAS, CAB or the Treasury, is not what it is called, but whether the guidance has helped people to better understand their retirement position, in preparation for them either making their own decisions or using an IFA.

jamesd

Guidance: general description of options with some limited customisation to narrow down the range of appropriate options based on information provided. Describing what annuities, flexi-access drawdown and deferring the state pensions are, as well as their key features like annuities automatically losing the capital immediately and drawdown needing careful management to avoid a need to decrease income later are general guidance. You are responsible for choosing from the range of options you get.

Advice: a detailed consideration of personal circumstances, desires and needs delivering a fully customised recommendation about the best action to take, backed up by redress if the advice did not properly consider your circumstances. You are responsible for deciding whether to accept the advice or not.

MSE forum: a blend of guidance and unregulated advice but without warranty of any sort and usually without the sort of comprehensive consideration of all circumstance that full financial advice can provide. You are responsible for deciding whether the suggestions make sense and fit your needs or not.

"What do we do for the people that don’t want to take the guidance, is there a default product for them?"

There is no default product, though remaining invested and explaining what UFPLS is is likely to be the best default choice because it preserves full flexibility while providing access.

Those obtaining guidance are adults who are free to make their own choices. Often the best choice, particularly for smaller pots, will be to withdraw all of the money as rapidly as possible within the basic rate income tax range to reduce pension costs, moving the money instead into identical investments inside a S&S ISA that will typically have lower ongoing costs.

It's particularly important that no providers make annuities the default choice because an annuity is an irreversible decision while drawdown or UFPLS allows an annuity to be purchased at any later time if desired.

"What happens if the people giving guidance get overexcited and stray into the realm of advice and the advice they give is bad – what redress does the consumer have?"

Guidance providers are not authorised to give advice so the usual regulatory provisions will not apply. But I assume that there's still some duty of care as in normal contract law.

"What happens to the people that have small pensions and don’t just want to take a lump sum, but can’t afford to pay for advice?"

Small pension pots, as distinct from small pensions, are an area where the best choice is likely to be to withdraw the money from the pension as rapidly as avoiding higher rate income tax allows and move the money into alternative things like the S&S ISA that typically have lower ongoing costs. Even for much larger pots this is likely to be the best cost-reducing choice in the absence of inheritance tax concerns.

" Instead I’ll keep blogging on pensions up until April to give you all the information you’ll need when it comes to making one of the most important decisions of your life."

Possibly the most important guidance is that there is no need to make any irreversible decisions. UFPLS is available and will meet many needs reasonably, particularly if combined with deferring the state pension rather than annuity purchase for those in normal good health.

Explaining life expectancy at various ages using the 2010-based ONS cohort life expectancies for the whole UK would be useful education to counter the tendency of people to underestimate this life expectancy.

Well before 6 April 2015 it is useful to explain how capped income drawdown can be used to take an income from a pension up to the GAD limit without triggering the reduction of the annual contribution allowance from £40,000 to £10,000. Since the option to start new capped drawdown will cease this is time-critical guidance.

jamesd

You might also want to help to explain how to increase the success rates and income levels of annuities using the results of research, since the potential safe withdrawing levels can be increased from 4% to around 6.5% of capital value. I've described some of the studies here. There's a lot of writing about drawdown risk but not much writing about the study results that show how to improve outcomes, so it would be a very useful bit of financial education to spread the research knowledge more widely into actual practice.

Linton

Hopefully the pension companies will come up with a packaged drawdown product investing in say a vanilla global fund. Until that day comes providing drawdown guidance without advice being available on what to invest in seems highly dangerous to me. Isnt any talk about possible suitable investments bordering on advice, or alternatively so vague as to be useless?

Is suggesting to someone that transferring out of a DB scheme is perhaps not a good idea pure guidance?

jamesd

Linton, anyone considering drawdown is likely to have had many decades of investing already, the least well informed probably in managed balanced funds.

Saying that transferring out of a DB scheme is usually a bad idea for those in normal good health while explaining that sometimes transfer values and/or reduced life expectancy can make it a good idea seems like reasonable guidance. Someone still needs to get the transfer value, estimate the life expectancy and work out whether the transfer would or wouldn't make sense in a particular case.

Linton

jamesd wrote: »

Linton, anyone considering drawdown is likely to have had many decades of investing already, the least well informed probably in managed balanced funds.

Saying that transferring out of a DB scheme is usually a bad idea for those in normal good health while explaining that sometimes transfer values and/or reduced life expectancy can make it a good idea seems like reasonable guidance. Someone still needs to get the transfer value, estimate the life expectancy and work out whether the transfer would or wouldn't make sense in a particular case.

I dont believe the majority of people coming for guidance would have decades of investing knowledge. Those who did probably wouldnt need the guidance. Far more likely would be that they had simply put money blindly into the default fund, assuming that they werent in a DB scheme anyway.

The problem isnt what we think would be a good strategy for someone adopting drawdown but rather whether people offering guidance can make those views known to someone with a pension pot of say £40K with sufficient clarity and specificity for that person to go off and set up and manage drawdown for themselves without going over the line into "advice".

Would it be ethical to offer people that option if it was clear to you that they didnt have the knowledge or ability to do it properly themselves knowing that an IFA probably wouldnt be interested in helping them?

Again, say you were offering "guidance" and someone came to you saying that they had decided to "cash in" a DB pension. Would you simply tell them the mechanics? Or would you at least feel a duty of care to suggest it might possibly not be the best idea? At what point would you be "advising"?

redux

SnowMan wrote: »

MSE_Amy wrote:

The distinction between the two words and their meaning is especially confusing when you consider that consumers will be offered this guidance by organisations such as Citizens Advice – which in the regulatory sense, cannot actually give advice when it comes to pensions, just guidance. You can see how there could be some confusion.

So do you know if the pensions articles on the MSE website are guidance or advice? Given by the posts on this forum that start ‘Martin advised me’ clearly there is plenty of confusion on this.

Do you know that although MSE staff members post these threads for discussion of their blog and reporting articles, it's rather rarer that they come back to read and comment on the ensuing replies?

jamesd

jamesd wrote: »

anyone considering drawdown is likely to have had many decades of investing already, the least well informed probably in managed balanced funds.

Linton wrote: »

I dont believe the majority of people coming for guidance would have decades of investing knowledge. Those who did probably wouldnt need the guidance. Far more likely would be that they had simply put money blindly into the default fund, assuming that they werent in a DB scheme anyway.

The lower knowledge people probably didn't get to have a significant pension pot without investing for a significant time, though I agree with you that many will have just used a balanced managed fund. Usage of those is a huge part of the market.

Linton wrote: »

The problem isnt what we think would be a good strategy for someone adopting drawdown but rather whether people offering guidance can make those views known to someone with a pension pot of say £40K with sufficient clarity and specificity for that person to go off and set up and manage drawdown for themselves without going over the line into "advice".

Guidance isn't going to go into things like selecting a particular annuity type or annuity product but rather describing the features of annuities and how to learn more. Same for drawdown.

Linton wrote: »

Would it be ethical to offer people that option if it was clear to you that they didnt have the knowledge or ability to do it properly themselves knowing that an IFA probably wouldnt be interested in helping them?

For guidance it would be unethical not to describe a major option that could better meet the person's income and/or inheritance and contingency needs. But that guidance should also include facts about what is required to use the option, like using an IFA for enhanced annuity purchase or learning about investing for long term drawdown.

I think that just as we today have balanced managed products that are very frequently used during accumulation we're going to have drawdown funds specifically intended for decumulation for those who do not make a specific choice.

Linton wrote: »

say you were offering "guidance" and someone came to you saying that they had decided to "cash in" a DB pension. Would you simply tell them the mechanics? Or would you at least feel a duty of care to suggest it might possibly not be the best idea? At what point would you be "advising"?

When it gets into considering the specific numbers for an individual DB pension. See my previous comment about this case.

Daniel_Elkington

Actually it's a lot more simple than that.

Advice is the act of making a 'personal recommendation', ergo 'I recommend that you purchase this product'.

Anything else is guidance.

The problem is, whilst this is clear in the Conduct of Business Sourcebook, nobody really reads COBS.

Additionally, the regulator doesn't make it clear to folks because they assume knowledge and the press (sorry martin) don't really understand the guidelines either due to having degrees in English and/or/with Journalism.

If someone uses the word 'recommend' or 'advise', they are making a personal recommendation and are therefore providing advice which is a regulated activity. However using the word 'suggest' is technically not advice as suggesting that someone invest in something is not the same as recommending or advising. Even strongly suggesting is not advice.

Speaking on a contradictory matter, one should not advise in an unregulated arena. Exempli gratia; cash products. A regulated individual cannot 'recommend' a cash product as the sale of cash products is not regulated per se, ergo a recommendation cannot be made. We can strongly suggest that an individual does not require 40,000 cash products and could probably get away with a current account and an easy access cash-based NISA...

I'm assuming that the impartial guidance guarantee (assumption based on prior knowledge here) will run through an individuals circumstances and explain to the individual what options they have. I would suggest, not advice, that you consider the following example conversation to be indicative of something provided through the chatline:

"You could do X, but that would mean Y, then again you could do Z, but that would mean A. Are you an obese, chain smoking drunk with asthma and type 2 diabetes - if so you might qualify for an enhanced annuity of up to 8.5%. For advice on your options please go to www.pfs.org/yourmoney to find an adviser."

The problem is that, for years, people have been taking the first offer on the table - despite the retirement pack now stating on the front cover 'you may get more money if you talk to an IFA - this is an irreversible decision'.

Hope this helps,

Dan.