Concerns raised by regulator over savers’ use of pension freedoms
A year-long review of the retirement income market post pension freedoms by the Financial Conduct Authority (FCA), has identified a ‘number of shortcomings’ in the system.
It found that accessing pension pots early has become ‘the new norm’ with 72% of pots accessed by those aged under 65. Most of these people are choosing to take lump sums rather than a regular income.
The FCA found that 53% of pots accessed have been fully withdrawn and 90% of those had retirement savings below £30,000. 94% of consumers had other sources of retirement income in addition to the state pension.
The review also found that pension drawdown has become much more popular with twice as many pots are moving into drawdown – where the fund remains invested in financial markets to provide an income – than annuities – where retirees exchange their pot for a guaranteed income for life.
The FCA identified five key issues:
- 52% of fully withdrawn pots weren’t spent, but the money was moved into other savings or investments – some of this due to a lack of public trust in pensions. It can result in overpaid tax, missing out on investment growth or losing out on other benefits.
- Consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5% of drawdown was bought without advice compared to 30% now.
- Those who access their pots early without taking advice typically accept drawdown from their current pension provider without shopping around.
- Providers are continuing to withdraw from the open annuity market which the FCA said could bring a risk of weakened competition.
- Product innovation has been limited to date, particularly for the mass market.
The regulator is proposing to gather further evidence to assess whether additional protections should be put in place for consumers who buy drawdown without advice. It will also ask the government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot.
The FCA also wants to make it easier to compare and shop around for drawdown. A final proposed remedy is for tools and services to help consumers understand their options after the pension freedoms in a bid to improve trust in pensions.
‘This report looks like a regulatory cry for help’
Tom McPhail, head of policy at Hargreaves Lansdown, said: “This report looks like a regulatory cry for help; the FCA seems to be trying to put the pension freedoms genie back in the bottle. The liberalisation of pensions has proved very popular with investors but this regulatory review highlights some of the shortcomings in the system.
“The FCA is looking at a spectrum of paternalistic interventions, such as price caps and governance committees but we’re not sure this is in consumers’ best interests. It has expressed concern about a lack of competition in market place, yet the majority of the measures proposed here seem likely to stifle competition: better investor engagement is likely to lead to better competition. We’d like to see more emphasis placed on helping investors make good decisions for themselves.”
Kate Smith, head of pensions at Aegon said:“Today’s report highlights just how significantly the pension freedoms have changed consumer behaviour when it comes to retirement decisions and the knock on effects this is having on the industry. The FCA’s figures suggest we’re seeing the majority of small pots accessed well before traditional retirement age with around two fifths of people either paying down debts or spending the money, with half saving or investing it. The trend for people to withdraw money and save it is somewhat concerning given that many be moving towards low paying cash accounts and limiting their ability to benefit from further tax relief via a pension.
“The findings suggest that this sort of approach is sustainable while people have DB pensions and the state pension to fall back on as a means of providing a guaranteed income in later life. Looking longer term, the number of people who can expect a generous DB income will decline over time and the market needs evolve in a way which helps people understand the different options open to them and the best way to maximise their savings when turning them into a retirement income.”