FCA highlights risks of pension drawdown
In general, the regulator found that information provided by pension groups was clear, fair and comprehensive, but added that customers face a raft of retirement risks if not taking advice. These included paying too much tax or running out of money.
Assets in pension drawdown now exceed £100 billion, with almost 700,000 retirees opting for drawdown. Over 200,000 of these haven’t taken advice, a significant rise since freedoms were introduced in 2015. In a sign that many may be paying too much tax, the new freedoms have seen a boost to the Exchequer of over £5bn in tax.
Steven Cameron, pensions director at Aegon said: “(The FCA’s) latest findings show that pension firms are meeting the regulator’s requirements, providing comprehensive and timely information which is clear and fair. But despite this, not all customers are fully engaging with the information, increasing the risk of running out of money in retirement or choosing investments that are either too risky for them or don’t generate enough return. This reinforces the benefits of seeking advice.
“Those who were first to use the pension freedoms back in April 2015 look to have done well. Looking at typical investment returns over the last three years, people taking the average income of 5.2%1 may find they have more in their pot than when they started, even after taking substantial income. However, retirement can last 20 or even 30 years and as investment returns can change dramatically year on year, this level of income may not be sustainable for life.”
Before pension freedoms, the Government set limits and required pension providers to review policies every three years. It also forced retirees to reduce their income if it looked like funds were being run down too quickly. Today, there is no compulsion to review retirement arrangements.
Andrew Tully, pensions technical director, Retirement Advantage said: ‘The DIY Drawdown market has grown significantly over the past three years, largely driven by the pension freedoms. Many more people are choosing to go it alone but with this ability to dip into your pension like a bank account comes with many new risks including paying too much tax on withdrawals, being scammed out of your money, taking on too much investment risk and running out of money before you die.
“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.” He suggests that taking advice can help advisers navigate this.