Publishing its Retirement Outcomes Review today, the FCA says retirees putting pension withdrawals into cash could be getting 37 per cent extra income by investing in a mix of assets. It wants the industry to develop ready-made drawdown investment solutions, within a simple choice architecture it describes as ‘investment pathways’, which reflect standardised consumer objectives.
It says one in three consumers who have gone into drawdown recently are unaware of where their money was invested, while some providers were ‘defaulting’ consumers into cash or cash-like assets, even though holding cash is highly unlikely to be suited for someone planning to draw down their pot over a longer period.
It found that charges for non-advised consumers vary considerably from 0.4 per cent to 1.6 per cent between providers, and are, on average, higher than in accumulation – where they are often capped at 0.75 per cent. It accepts that drawdown charges can be complex, opaque and hard to compare. It says so far, it has not seen significant product innovation for mass-market consumers.
The TUC says this strengthens the argument for Nest to be allowed to offer decumulation products, and has called for the ban on them doing so to be lifted.
The regulator has today launched a consultation on a package of measures, including mandatory ‘wake-up packs’ to be sent to savers every five years from age 50 and more information about post-retirement charges, which it found vary widely.
The final report of the Retirement Outcomes Review, the FCA’s in-depth look at how the pensions and retirement income sector has been working since the pension freedoms were introduced in 2015, has found some customers are at risk of harm. The regulator estimates that some drawdown customers could receive 37 per cent more retirement income from their pot every year by investing in a mix of assets rather than cash. It says defined contribution pension pots will grow significantly in the coming years and it plans to put this market on a good footing and keep it under review.
The FCA is inviting views on the introduction of investment pathways for customers at the point of entering drawdown. It believes that a more structured set of options would help consumers to engage with the decisions they are making, consider what their retirement objectives are and ultimately end up with a more appropriate investment solution. The FCA also wants firms to ensure that consumers make an active choice to be invested in cash.
The regulator is proposing that new ‘wake-up’ packs will have to include a single page summary, sometimes called a ‘pensions passport’ and firms will also have to include specific retirement risk warnings at the same time as the new packs.
In its report, the FCA found that 60 per cent of consumers not taking advice about drawdown were not sure or only had a broad idea of where their money was invested. A third of consumers were wholly invested in cash with around half of these likely to be losing out on income in retirement.
The FCA is also proposing that firms include a one-year charge figure in pounds and pence in the key features illustration they provide to consumers. The FCA found that drawdown charges vary considerably from 0.4 per cent to 1.6 per cent between providers and can often be complex, opaque and hard to compare. If firms fail to introduce investment pathways with appropriate charge levels, the FCA has not ruled out introducing a cap on drawdown charges.
FCA executive of strategy and competition Christopher Woolard says: “We know that the choices introduced by the pension freedoms have been popular with many consumers. However, they’re now required to make more complicated decisions than ever before. Many people need more support when making choices. The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand.
“This is an important market that is still relatively new and is continuing to evolve. This is not the end of the work we are doing and we will continue to keep the market under review as it develops.”
TUC pension officer Tim Sharp says: “Working people need a pension system that treats them well and delivers a regular pay cheque in retirement. But this report reveals a retirement income market that often over-charges and confuses people. This is causing bewildered savers to shift their money into cash leaving them exposed to inflation.
“We welcome the regulator’s desire to explore investment pathways. If implemented well these could help savers make good decisions when they finish work.
“But we need a clampdown on rip-off charges and the state-backed Nest freed to offer its members retirement products.”