The Financial Conduct Authority (FCA) is consulting on measures to stop up to 100,000 consumers a year losing out on pension income when they access their pension freedoms.
The comes after the FCA previously expressed concern about consumers moving into drawdown and holding their funds in investments that will not meet their needs.
The FCA is now proposing that firms offer customers, who do not take advice, a range of investment solutions that broadly meet their objectives, otherwise known as “investment pathways”.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “The pension freedoms give consumers more flexibility in how and when they can access their pension savings; but that also means they have to make more complicated choices. Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the ‘path of least resistance’ when entering drawdown.
“This can often mean that the rest of their drawdown pension pot is not invested in a way that meets their needs and intentions. We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. This leads to poor consumer outcomes.
“Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement”.
Customers will choose from four objectives for their retirement pot – and be offered a solution based on their choice. Smaller drawdown providers will be able to refer investors to another provider or the Single Financial Guidance Body’s drawdown comparator tool.
Jon Greer, head of retirement policy at Quilter, said: “The risk around investment pathways is it becomes the path of least resistance and people go for a default instead of engaging. When they come in they will need to be positioned carefully to ensure we quash any misconception that it doesn’t require the customer’s ongoing input.”
The FCA is also proposing that consumers’ pension investments are not defaulted into cash savings unless the customer actively chooses this option.
These measures are a part of the FCA’s wider pensions strategy, and follow from the Retirement Outcomes Review report in summer 2018.
The FCA is also announcing new rules on the “wake up packs” that must be given to consumers as they approach retirement, and on the disclosure of charges by pension providers.
Commenting on the policy statement, Steve Webb, director of Policy at Royal London, said: “The big outstanding challenge around pension freedoms is not people with large pots blowing the lot on a sports car, but is about more inexperienced investors with smaller pots leaving them invested in cash for long periods of time or withdrawing them altogether. These FCA rules are a sensible response to the risk of savers sleepwalking into seeing their hard-earned savings eroded by sitting in low-return cash investments. But there is still a problem where people cash out the whole pot and transfer it into a cash ISA or current account.”
Also commenting on the issue, Neil Liversidge, managing director of Castleford-based West Riding Personal Financial Solutions, said “I can see pension providers manipulating this to deter or discourage clients from taking independent advice, especially those that have obvious ambitions to be the next SJP. We have experienced several instances of insurers trying to poach our clients. They invariably claim it was a mistake but their excuses ring hollow.”
Changes on making the cost of drawdown products clearer and comparison easier will come into force on 6 April 2020. This is still subject to consultation.
The FCA is inviting feedback from stakeholders on measures in the consultation paper by 5 April 2019, before finalising the rules.
Aamina Zafar is one of the UK’s leading financial journalists. She has previously worked as a senior reporter at FT’s Financial Adviser. The award-winning journalist writes regularly on the IFA community, mortgages, pensions and financial regulation.
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