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  • FIRST POST
    • Former MSE Helen
    • By Former MSE Helen 20th Jan 15, 12:40 PM
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    Former MSE Helen
    MSE Blog: Do you know the difference between pensions guidance and advice?
    • #1
    • 20th Jan 15, 12:40 PM
    MSE Blog: Do you know the difference between pensions guidance and advice? 20th Jan 15 at 12:40 PM
    "If youíre retiring this year and planning on taking your pension post-April when the new pension freedoms come into force (or even if youíre not), itís 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?


    Click reply below to discuss. If you havenít already, join the forum to reply. If you arenít sure how it all works, read our New to Forum? Intro Guide.

Page 1
    • atush
    • By atush 20th Jan 15, 4:59 PM
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    atush
    • #2
    • 20th Jan 15, 4:59 PM
    • #2
    • 20th Jan 15, 4:59 PM
    Yes. I know the difference.
    • SnowMan
    • By SnowMan 20th Jan 15, 5:14 PM
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    SnowMan
    • #3
    • 20th Jan 15, 5:14 PM
    • #3
    • 20th Jan 15, 5:14 PM
    Do you know the difference between pensions guidance and advice?
    by MSE Amy
    Yes I know the difference
    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.
    by MSE Amy
    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.
    Last edited by SnowMan; 20-01-2015 at 5:55 PM.
    I came, I saw, I melted
  • jamesd
    • #4
    • 20th Jan 15, 8:05 PM
    • #4
    • 20th Jan 15, 8:05 PM
    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
    • #5
    • 20th Jan 15, 8:35 PM
    • #5
    • 20th Jan 15, 8:35 PM
    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
    • By Linton 20th Jan 15, 8:36 PM
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    Linton
    • #6
    • 20th Jan 15, 8:36 PM
    • #6
    • 20th Jan 15, 8:36 PM
    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
    • #7
    • 21st Jan 15, 12:49 AM
    • #7
    • 21st Jan 15, 12:49 AM
    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
    • By Linton 21st Jan 15, 8:32 AM
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    Linton
    • #8
    • 21st Jan 15, 8:32 AM
    • #8
    • 21st Jan 15, 8:32 AM
    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.
    Originally posted by jamesd
    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
    • By redux 21st Jan 15, 12:11 PM
    • 19,295 Posts
    • 26,458 Thanks
    redux
    • #9
    • 21st Jan 15, 12:11 PM
    • #9
    • 21st Jan 15, 12:11 PM

    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 Ė 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.
    by MSE Amy
    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 ĎMartin advised meí clearly there is plenty of confusion on this.
    Originally posted by SnowMan
    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
    anyone considering drawdown is likely to have had many decades of investing already, the least well informed probably in managed balanced funds.
    Originally posted by jamesd
    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.
    Originally posted by Linton
    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.

    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".
    Originally posted by Linton
    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.

    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?
    Originally posted by Linton
    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.

    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"?
    Originally posted by Linton
    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.
    • atush
    • By atush 21st Jan 15, 3:22 PM
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    atush
    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.
    And the regulators themselves are confused on this issue having upheld complaints from execution only sales?
    • sandsy
    • By sandsy 21st Jan 15, 6:20 PM
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    • 898 Thanks
    sandsy
    Advice is the act of making a 'personal recommendation', ergo 'I recommend that you purchase this product'.
    Originally posted by Daniel Elkington

    Doesn't it go further than that? Is 'I recommend you buy an annuity' isn't necessarily a personal recommendation?


    But 'I recommend you buy the XYZ annuity product from ABC Life' is?
  • Daniel Elkington
    I recommend you buy an annuity is a personal recommendation, its not a very helpful one either.

    The regulator doesn't like e-only as often the client doesn't know what they want. How can someone with no prior knowledge of a 5 year guarantee, let alone the 55% death tax on taking it as a lump sum, instruct someone over the telephone to apply it?
    • Andy L
    • By Andy L 22nd Jan 15, 7:37 AM
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    Andy L
    Doesn't it go further than that? Is 'I recommend you buy an annuity' isn't necessarily a personal recommendation?


    But 'I recommend you buy the XYZ annuity product from ABC Life' is?
    Originally posted by sandsy
    I suspect that the new guidance/advice/chat with someone who's had a weeks induction training won't make any recommendations just to avoid the problem, eg it will say:

    "you could buy an annuity, which has these pros & cons...
    you could do draw-down,which has these pros & cons...
    you could blow it all on coke, hookers & sports cars which has etc..etc"

    ie it just explains the options, possibly tailoring it to the receivers numbers
    • dunstonh
    • By dunstonh 22nd Jan 15, 8:15 AM
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    dunstonh
    Doesn't it go further than that? Is 'I recommend you buy an annuity' isn't necessarily a personal recommendation?
    It ought to be. Although you are right that it isnt.

    The people giving this guidance are not qualified and only trained in basics. Typically to give investment drawdown advice, advisers have higher qualifications beyond the normal adviser ones (eg. J05, AF3 etc). So, how on earth can we expect untrained, unqualified people to steer anyone other than the obvious cases.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jamesd
    So, how on earth can we expect untrained, unqualified people to steer anyone other than the obvious cases.
    Originally posted by dunstonh
    Some obvious cases will handle a lot of the market:

    1. desire to preserve capital for inheritance: automatically eliminates annuity and state pension deferral, leaving drawdown and related options.

    2. small pot, into the range where annuity purchase pays out less than 100% of the money used to buy the annuity on average: tends towards withdrawing as cash and/or drawdown to get better value for money after observing that part of the annuity value is insurance against long life.

    3. under age say 75, deferring the state pension pays more than annuity purchase for normal life expectancy, so recommending that instead of annuity is appropriate.

    Life expectancy is what I think will be a commonly missed factor but the obvious cases where annuities are poor value compared to alternatives will take care of a lot of the lower value pot case and greatly reduce the volume of people who require something more.

    One of the great benefits of even guidance may be a large drop in low value annuity sales in favour of deferring the state pension.
    • Linton
    • By Linton 22nd Jan 15, 10:58 AM
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    Linton
    Some obvious cases will handle a lot of the market:

    1. desire to preserve capital for inheritance: automatically eliminates annuity and state pension deferral, leaving drawdown and related options.

    2. small pot, into the range where annuity purchase pays out less than 100% of the money used to buy the annuity on average: tends towards withdrawing as cash and/or drawdown to get better value for money after observing that part of the annuity value is insurance against long life.

    3. under age say 75, deferring the state pension pays more than annuity purchase for normal life expectancy, so recommending that instead of annuity is appropriate.

    Life expectancy is what I think will be a commonly missed factor but the obvious cases where annuities are poor value compared to alternatives will take care of a lot of the lower value pot case and greatly reduce the volume of people who require something more.

    One of the great benefits of even guidance may be a large drop in low value annuity sales in favour of deferring the state pension.
    Originally posted by jamesd
    On the other hand many people with no hands-on experience of investing will state that "no risk" is a requirement. Which will make annuities the only choice except for small pots when cash in hand is seen as more valuable than a very small amount of cash in the future. In general many people's stated objectives will be incompatible with each other and and they will need guidance (advice?) and time from someone with sufficient experience to help them come to an optimal decision.

    On state pension deferral, clearly at the moment using small pots to allow deferral for a year or two could be beneficial, but what about when the rate goes down to 5%?
  • jamesd
    If there is a true no risk requirement annuities are unsuitable because they don't meet that requirement, having a potential loss of 10% or more if the FSCS has to pay out, the uncertainty because the value of an annuity is not certain and the relevant court might impose a discounted value on which the FSCS would pay. Annuities are OK for low risk, though.

    For the closest choices available to no risk there are the options of taking the money out and placing it in deposit accounts to get the 100% FSCS guarantee, deferring the state pension and trusting the government or buying gilts or NS&I and trusting the government. The savings accounts aren't completely no risk either but they are the closest available, being backed first by the financial institution, then by the industry via the FSCS and finally the government via its support for the FSCS.

    For those reaching state pension age after the flat rate system comes in and who have the lower 5.8% deferral increase that can be compared to the annuity options available to them. At present the 5.8 inflation-linked value is higher than even the level annuity rates available in the annuity market around state pension age, with today's FT comparison giving 5.633% as the highest available for a single life level annuity with no guarantee at age 65. 5.8% inflation-linked easily beats 5.6% with no inflation link. For the annuities with guarantee periods the deferring can be combined with a term life insurance policy and will still be ahead at normal health. For dual life the deferring already provides some spousal inheritance and insurance could be used to increase that if desired.

    enhanced annuities are potentially more interesting because they could pay out more. Even so, 10.4% then 5.8% inflation-linked will beat a lot of them.

    One of the outcomes I'll be looking at to decide whether I think that the guidance and annuity market work by the FCA has succeeded is whether there is a complete collapse of the low value standard annuity market. If there isn't I'd take that as very strong evidence of guidance and FCA reform failure.

    Few of these are really no risk, unless it's a product that delivers an uncapped inflation-protected income. Deposit accounts are just the closest to no risk that most people would think of because they would typically ignore losses due to inflation. That loss is also something that I'd hope guidance would explain, helping people to understand that there really isn't a no loss option, it's more a case of choosing which risks to take.
    Last edited by jamesd; 22-01-2015 at 12:51 PM.
    • Linton
    • By Linton 22nd Jan 15, 1:03 PM
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    Linton
    For those reaching state pension age after the flat rate system comes in and who have the lower 5.8% deferral increase that can be compared to the annuity options available to them. At present the 5.8 inflation-linked value is higher than even the level annuity rates available in the annuity market around state pension age, with today's FT comparison giving 5.633% as the highest available for a single life level annuity with no guarantee at age 65. 5.8% inflation-linked easily beats 5.6% with no inflation link......
    Originally posted by jamesd
    The trouble is that 5.8% inflation linked only beats 5.6% with no link in the long term. Having lost a year or more of SP income the payback time starts getting rather close to life expectancy.
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