Published on Wednesday, the regulator’s Retirement Outcomes Review (ROR) interim report looks at the effects of the pension freedoms, introduced in April 2015, giving people over 55 unrestricted access to their pension savings.
Non-advised drawdown
Prior to the reforms, once they hit retirement age, most savers were limited to using their pension pots to purchase an annuity guaranteeing a yearly income for life.
Following the new rules, savers over 55 can withdraw a 25% lump sum from their pensions tax free or withdraw the whole pot which would be subject to varying rates of tax.
As a result, the FCA says it is concerned that too many consumers are taking the “path of least resistance” and taking out uncompetitive drawdown products with their current provider, without taking financial advice, in a bid to access their tax-free lump sum.
Drawdown is a product where pension savings are typically left in the stock market, and therefore are considered risky.
Citing statistics from the Association of British Insurers (ABI), the UK watchdog said that 94% of non-advised drawdown sales have been to existing customers, with only 6% of sales to new customers, raising fears that more needs to be done to protect those buying such products.
New rules
The FCA said it wanted to “decouple” the decision to access tax free cash with what savers are doing with the rest of their pot, adding that many people would be better served by remaining invested in a pension rather than accessing their money and moving to a different kind of savings account.
The regulator added it is considering working with the UK tax office and treasury to introduce new legislation to allow savers to take some of their pension savings early while remaining in their accumulation product.
“This will ensure that consumers only have to make a choice about their retirement income product at a time when they are ready to do so, for example, when they are considering fully or partially retiring,” the FCA report said.
The regulator also said it will make it easier for consumers to compare and shop around for drawdown products as well as introduce tools and services to help consumers make good choices.
‘New norm’
The study also found that over one million defined contribution pension pots have been accessed since the pension freedoms with early access to pension pots ‘the new norm’.
Over half (53%) of pots accessed have been fully withdrawn, while most consumers (94%) who fully withdrew their defined contribution savings had other sources of income in addition to the state pension.
‘Disastrous consequences’
Jon Greer, head of retirement policy at Old Mutual Wealth, welcomed the FCA’s plans to improve consumer protection in the non-advised market, adding the regulator’s findings show that “consumers simply cannot afford not to take advice at the point of retirement”.
“Over half of customers are taking their retirement savings and investing in something else, like an Isa, cash, buy-to-let or fixed-term deposit. This can have disastrous long-term consequences.
“Taking a lump sum in a single tax year is likely to result in paying more income tax than withdrawing money gradually. And savers are giving up future tax-free investment growth in a pension in exchange for comparatively low-growth assets like cash, or illiquid property.
Image problem
Citing figures from the Office of National Statistics, which last week revealed that almost half of people (49%) consider property the best means of making money for retirement.
Greer said: “The report confirms that pensions are suffering an image problem. But modern pension products offer competitive charges, a range of investment options, liquid investments that can be easily sold to produce income, and come with the protection of the Financial Services Compensation Scheme (FSCS).
“Trust in pensions is a major issue and the regulator and the savings industry must do more to understand why some members of the public are fearful of pensions.”
