RIAAT and retirement income advice – looking forward to 2025

Retirement income advice has been a particular focus of the Financial Conduct Authority in recent years. Looking forward into 2025, there are many challenges and risks facing firms in respect of their provision of retirement income advice.

The increased focus on retirement income advice by the FCA comes amid the backdrop of an ageing population and a growing retirement income market. The FCA’s Retirement Income Advice Assessment Tool ("RIAAT") was set up in February 2024 to help personal investment firms understand how the FCA assesses the suitability of their retirement income advice and disclosures to consumers. Under the RIAAT, firms are required to maintain detailed and accurate records of advice, including client risk tolerance, income needs and wider financial circumstances.

As time goes on, fewer retirees are having the security of a defined benefit scheme, and more complicated advice is required in respect of what investments to hold, the member's needs and their level of required income. The publication of the RIAAT follows on from the Consumer Duty which introduced higher standards of care on financial services firms, emphasising fair treatment and the need to evidence good outcomes for clients. Indeed, a whole page of the RIAAT spreadsheet is dedicated to the Consumer Duty requirements.

Both the RIAAT and Consumer Duty place a particular focus on vulnerable clients. The FCA has also published advice on how to support consumers with characteristics of vulnerability when providing pension transfer advice. This increased focus on vulnerable clients threatens to present additional challenges to firms, particularly in light of the current economic landscape in the UK. Inflation, which has remained higher than forecast in recent months, fell slightly to 2.5% in December 2024. However this is still above the Bank of England's target of 2%. Meanwhile the Office for National Statistics confirmed on 16 January 2025 that the UK economy grew by only 0.1% in November 2024, following two months of contraction. Moreover, the increase in the Government's borrowing costs in recent weeks raises concerns about potential emergency cuts to public services, in addition to existing cuts such as the means testing of the winter fuel payments. These pressures risk increasing the number of consumers that the FCA deems to be vulnerable.

Facing serious financial difficulty, a larger number of consumers may be more susceptible to opting for unsustainable drawdowns, significantly increasing the risk of the consumer running out of money. Providing advice to an increasing number of vulnerable clients in accordance with the requirements of both the RIAAT and Consumer Duty will be a major challenge to many firms. While not compulsory under the RIAAT, the FCA has previously noted that cashflow modelling "can be a key step in providing suitable advice. It is used to project the income flows that different assets could generate and compare these with the client’s estimated retirement needs." The heightened risk of members running out of money may encourage more firms to adopt cashflow modelling as a way of ensuring that the consumer receives an appropriate level of income and evidencing that their advice is suitable.

More consumers may also become susceptible to scams or fraudulent activity. The FCA is clearly aware of this possibility and has previously urged pension schemes and trustees to report to them any concerns or suspicions about pension transfer requests. Furthermore, growing economic hardship may also motivate more consumers to bring claims against firms if they believe they have potentially provided them with advice that adversely impact the value of their pension. The increase of the compensation cap by Financial Ombudsman Service to £430,000 may also add to this.

The new requirements may pose a significant challenge to smaller firms who may struggle to allocate the necessary resources to implement the requirements fully. Overall, 2025 looks to be a more challenging year for firms providing retirement income advice. With an ever-increasing number of consumers requiring more complicated advice and potentially larger numbers of vulnerable consumers, firms will have to ensure their processes for providing advice and disclosure meet the FCA's requirements.