The regulator’s investigation into life offices and Sipp providers has found that investors accessing pension freedoms are not fully engaged with the risks of drawdown, particularly when accessing the pension commencement lump sum (PCLS), without considering what to do with the rest of their pension funds, and therefore potentially investing in unsuitable investments.
The FCA says many customers appear to have already made the decision to enter drawdown before contacting a provider, making them not open to exploring the full range of options available to them.
Some customers accessing PCLSs have remained in low-risk assets after following lifestyling strategies. Others have stayed in cash funds because they have had to enter into a new contract to access drawdown. Both these options increase the risk of customers running out of money in retirement, or having less money than they were expecting, says the FCA.
It also found a small number of instances where the value of guaranteed annuity rates and protected tax-free cash were not sufficiently well understood.
The latest FCA Data Bulletin, ‘Trends in the retirement income market’ March 2018 shows 32% of drawdown sales have been non-advised – growing from a market of 5 per cent before the launch of pension freedoms, while 58 per cent of drawdown customers don’t shop around and stay with their existing pension provider.
Pensions and Lifetime Savings Association policy lead: DC Tim Gosling says: “Turning a pot of money into an income is a challenging financial task and the FCA’s new report shows people are struggling in the absence of advice.
“The need for default investment pathways in non-advised drawdown to ensure good outcomes for savers is now clear. The FCA suggested this as a customer protection measure in the interim report of the Retirement Outcomes Review and we believe they should now follow through on that in their final report.
“In the future, the PLSA would like savers to benefit from a decumulation process that supports them in making good decisions throughout the course of their retirement. In particular we need to learn from the success of automatic enrolment and the power of defaults while still preserving retirees’ freedoms to act as they wish.
“We propose that trustees or IGCs should be able to select a decumulation product appropriate to the membership of their scheme and should sign-post their members to this product at retirement. This would create a clear path to a suitable income product for scheme members to follow if they chose. Members would be encouraged to make an active decision; and no member would be moved into the sign-posted decumulation product or solution without their explicit consent.
Barnett Waddingham senior consultant Malcolm McLean says: “It is reassuring to note the FCA has concluded that firms are in the main meeting their obligations to communicate clearly with customers and are providing the necessary information for them to make informed decisions about their retirement options.
“There were some exceptions where firms in the sample were not fully meeting the requirements and agreed actions are to be followed up by FCA.
“Rather more worrying, however, is the revelation that some customers appear not to be fully engaging with the information and are potentially putting themselves at risk of harm. One example given is the tendency for customers to take the PCLS without any clear plan on how to draw down the rest of the money in their fund.
“It is not clear what, if anything, FCA proposes to do about this – other than use the findings of this review to help inform its wider Retirement Outcomes Review report later in the year.”
Retirement Advantage pensions technical director Andrew Tully says: “Official data shows many people are choosing the path of least resistance and simply buying from their existing pension provider without taking advice or shopping around. Freedom and choice has introduced a whole new layer of complexity which only serves to create confusion, so seeking guidance, and ideally getting proper regulated financial advice are essential.”