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New pension drawdown rules spark concern

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31/07/2019
The city regulator is taking steps to protect retirees who do not take financial advice – but pension experts say the new measures don’t go far enough.

From April 2020, all pension providers will have to offer four investment ‘pathways’ to customers who are considering entering drawdown.

Drawdown is when you re-invest your pension pot at retirement but you’re able to make withdrawals at any time.

The four options providers will have to present to customers are:

  • Option 1: I have no plans to touch my money in the next five years
  • Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next five years
  • Option 3: I plan to start taking my money as a long-term income within the next five years
  • Option 4: I plan to take out all my money within the next five years

The Financial Conduct Authority (FCA) hopes these pathways will ensure non-advised drawdown customers are invested in the most suitable funds for their circumstances.

A big concern is the number of savers invested wholly in cash, which may seem like a safe option, but isn’t sensible over the long-term.

“While cash may be appropriate as part of a portfolio, or as a short-term strategy, people using drawdown need to generate investment returns to mitigate the effects of inflation and charges,” said Andrew Tully, technical director at Canada Life.

According to FCA research, 30 per cent of consumers enter drawdown unadvised and around one in three are unaware of where their money is invested. A third of non-advised drawdown consumers hold cash only.

A consumer drawing down their pot over 20 years could increase their expected annual income by 37 per cent by investing in a mix of assets rather than just cash, the regulator said.

Under the new measures, providers will have to ensure that consumers entering drawdown invest wholly or predominantly in cash only if they have taken an active decision to do so.

Firms will also have to give warnings to customer who do decide to invest in cash.

What do the experts say?

While pension experts have broadly welcomed the FCA’s proposals, some believe they don’t go far enough.

Tom Selby, senior analyst at investment firm AJ Bell, said: “The FCA is clearly attempting to protect consumers from harm through the introduction of investment pathways. However, in doing so it risks pushing savers into retirement solutions that do not meet their specific needs and hard-wiring disengagement at exactly the point people should be taking charge of their fund.

“While the FCA’s determination to make pathways simple is commendable, the idea all retirement income options can be covered by just four investment solutions is unrealistic.

He added: “If people’s personal circumstances change – as they have a habit of doing – a previously chosen pathway may become inappropriate and will need to be reviewed.

“Ensuring people are aware pathways are not a catch-all solution will be absolutely critical to protect consumers who choose them.”

Meanwhile, Nathan Long, senior analyst at Hargreaves Lansdown, said the new rules could have unintended consequences.

“Drawdown is a riskier way of drawing from your pension, involving two conundrums; where to invest and how much income to draw, the latter is absent from the remedies.

“People should only choose drawdown if they are sure of the risks involved, and there’s a danger these rules prompt more people to sleepwalk into uncertainty rather than opting for a guaranteed income.

“Ultimately, the best outcomes in retirement will still come from people engaging more with their pension before, at and during retirement.”

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