People in the UK aged 50 or over will start to receive “wake up” packs every five years under proposals published today by the Financial Conduct Authority (FCA).
The chief City regulator wants the packs to include a one-page headline document, setting out the options for people as they consider whether to access their retirement savings under the pension freedoms put in place by George Osborne, the former chancellor, three years ago.
The packs will also include appropriate risk warnings aimed at preventing people from blowing their savings.
It is one of a number of proposals published by the FCA as part of its “retirement outcomes review”.
Others include making firms include a one-year-charge amount in the policy illustrations they send out to make sure customers have more information about the charges they could rack up when accessing their pension savings.
The charges applied to products, where someone takes money (or “draws down”) from their pension pot, but remains invested, are particularly opaque.
Previously, before the freedoms, savers had to buy an annuity – a kind of insurance policy providing a regular and set income over a set period of time.
These had become unpopular, because with interest rates at an all-time low, the rates provided by annuity providers were becoming increasingly unattractive.
The FCA said today there remains much ignorance concerning pensions drawdown.
Image: The FCA found people were not shopping around for the best way to take out their tax-free cash
It said that one in three customers who had recently taken out a drawdown product knew where their money was being invested and that some drawdown customers could be receiving 37% more retirement income by investing in a number of assets rather than cash. A third of pension pots were being accessed without any advice being taken.
The FCA added: “We have seen that many consumers, particularly when focused on taking their tax-free cash (a quarter of a retiree’s pension pot may be accessed on a tax-free basis), take the ‘path of least resistance’ and enter drawdown with their existing provider.
“We expect levels of engagement to increase over time as pot sizes grow.
“However, as pots become bigger, those who do not engage effectively could lose out on income in retirement, through poor investment choices or paying higher fees and charges.”
Central to what the FCA is proposing is more information that sets out to consumers how to access their pension pot, what their options are, and whether they want to buy an annuity or take out a drawdown product.
It would provide them with three ready-made drawdown investment solutions, or pathways.
These would be: “I want my money to provide an income in retirement”; “I want to take all my money over a short period of time”; or “I want to keep my money invested for a long period of time and may want to dip into it occasionally”.
That there is a greater need for information is not in doubt.
Image: The advice would help people make better decisions for their future, the FCA says
The FCA found, preparing the review, that a third of people using drawdown had no hands-on investment experience and that two in five of such people had received no advice.
Half of these people who had taken no advice said they had assumed drawdown would be simple. And nearly a third of them claimed they were confident in their investment decisions despite their previous lack of investment experience.
There is no doubt that what the FCA is proposing today makes sense.
The pensions freedoms have undoubtedly been popular but the proportion of customers not taking any advice is shocking, and so is the evidence on how much more money they could be receiving from their retirement savings were they to do so.
That one third of people entering drawdown without taking advice are simply leaving their money in cash beggars belief.
No one wants a nanny state but such people need saving from themselves.
There is also a need for greater clarity around charges applied to drawdown products.
Astonishingly, the FCA found as many as 44 different charges, with the charges themselves ranging from 0.4% to 1.6% a year. The regulator is not currently proposing to cap charges – but it remains an option.
This is probably the correct call, for now.
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The evidence is that, although charges can be slightly higher in some cases, they may be worth paying if the retiree is getting more personalised advice that generates a better investment return for them.
But the FCA is wise to retain the option of capping charges – if at least to keep the industry on its toes.