We know that an ageing population, falling birth rates and poor access to pension products are widening the gap between what people are saving and the amount they will have to put away to fund their retirements adequately. If we cannot diffuse the situation, the resources available to citizens of post-work age are going to be significantly outweighed by the need.
Imagine we, as a society, are poised to cut the red, green or brown wire and…shock! What if it all goes wrong? If we fail to innovate adequately as a society, the explosion of an ill-equipped retiring population is inevitable. It is imperative this challenge becomes a preoccupation not just of Government and charities but of the private sector too – particularly financial services.
As a Fintech, our part in that conversation at Wealth Wizards is small but, we think, important. Mainly because we are at the forefront of powering the solution to this problem in the FS sector. I’d like to set out some thoughts on the role of technology in diffusing the situation. But let’s first look at the problem more closely.
In 1980, according to the Organisation for Economic Co-operation and Development (OECD), the ratio of over 65s to working age was about 20%. By 2060, the figure will reach 58%.
The latest ONS projections show that in 50 years’ time, there are likely to be an additional 8.6 million people aged 65 years and over – a population roughly the size of London.
These shifting demographics are a huge problem – there are increasing numbers of people to support in retirement and fewer of us to do it. And there are two other major concerns.
Pension freedoms continue to change the way people access their money at retirement. Before the rule change in 2012, there were around 350,000 transactions a year in the annuities market. Yet, the number of pensions accessed has nearly doubled – to some 674,000 in 2019/20. The total number pots fully withdrawn in one go between April 2019 and March 2020 was more than 375,500.
Pension freedoms have been helpful for most people , giving them access to a transformationally different ability to be flexible and draw their money when they wanted to. This will continue to be true as long as the vast majority avoid mistakes like encashing all their money without advice.
So how well advised were all those retirement transactions? The answer, I’m afraid, is not very well. Nearly half (48%) took no advice or guidance.
In fact, people need help years – even decades – before this point and most aren’t getting it because of our old nemesis, the advice gap.
The “advice gap” is, of course, the difference between those who need advice and those people who can afford to receive it.
The Financial Conduct Authority’s 2018 research into consumer advice revealed that just 8% of the population had received regulated advice, translating into roughly four million people seeking the services of just under 26,000 advisers, or about 173 clients per adviser.
We have 50 million adults in the UK and, at Wealth Wizards, we estimate at least 30 million need some kind of help, whether that’s face-to-face or digitally-automated advice. Some simply need good information and education. Others need immediate and ongoing debt management. Still others need advice from a qualified, regulated professional.
It would be wrong to say that progress is not being made in addressing people’s retirement needs. Auto enrolment has been an extraordinary success with 10 million joining schemes by 2019, according to The Pensions Regulator. Yet, there are concerns more will optout and figures highlight many still won’t be saving enough to support them once they give up work.
What is certain is we’re under-serving the public – we have an advice and guidance gap. We need to do something very different and technology and great digital engagement are, without doubt, part of the solution.
We need a future in which the financial services industry is able to offer affordable help to the masses so people can make informed decisions early in their professional lives that will give them the best chance of navigating the challenges I’ve set out here.
And that shouldn’t just be guidance and coaching; when you consider the complex issues that relate to retirement, we’re also going to need fully regulated advice at a much greater scale.
What might be less obvious is that we cannot achieve this without technology. There simply aren’t enough qualified professional advisers to service the need.
Digital guidance from an early stage could begin to provide a solution. Simple, intuitive and engaging tech could, for example, deploy personalised nudges about topics like the tax benefits of retirement savings before bonus payments or, through Open Banking, suggest using spare money or bonuses to pay into a pension. And at the end of the tax year this tech could remind users of their remaining pensions and ISA allowances.
When full retirement advice becomes appropriate in more complex circumstances – for example, in pension pot consolidations, DB transfers, decumulation or annuity purchases – tech could still be deployed, this time producing regulated advice, leaving limited numbers of advisers to concentrate on the most complex cases.
With an automated tool that can analyse an individual’s circumstances quicker and less expensively, financial institutions could open up this sort of advice to more of their customers and much of it could be used directly by consumers with little or no support.
We have a head start in that there is already a large section of the population who are digitally capable with more than seven in ten of us using internet banking.
This number is likely to have grown rapidly in the pandemic, wit hall of us having had to get comfortable with communicating remotely through video conferencing, messaging apps and the like.
So any conversation about solving the retirement funding crisis that takes place without reference to technology is a non-starter. And, to return to the metaphor, if we fail to recognise this, the issue will likely blow up in our faces. I prefer an approach where we do not have to deal with the fallout – we act now, which is still not soon enough but is essentially a huge step forward. This is a time where digital solutions can help us evolve and put people first – making the future something in this case that could be within our control. At the moment, that is definitely a goal to pursue.
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