‘Pension passports’ and ‘wake-up’ packs proposed for over 50s
Pension freedoms were introduced in April 2015, giving retirement savers unfettered access to their pots.
While seen as a success, the financial regulator, the Financial Conduct Authority (FCA) has highlighted some risks which consumers are exposed to.
The biggest risks aren’t related to people running out of money. But given the freedom and choice, the FCA is concerned for those who don’t take advice, that a large portion of investments remain in low-yielding cash assets, and the varying and often high costs on pension portfolios.
Further, it said that consumers aren’t shopping around to get the best deals in drawdown and of those who have gone into drawdown, a third don’t know where their money is invested.
As such, the FCA is now consulting on a package of remedies, including the following:
- ‘Wake-up’ packs to be sent from the age of 50 and every five years until people have fully accessed their pension pot. The packs will need to include a single page summary called a ‘pensions passport’ and firms will need to include retirement risk warnings.
- ‘Investment pathways’ at the point of entering drawdown. A set of options would help people engage with the decisions they’re making, consider what their retirement objectives are, and mean they’re left with more appropriate investment solutions. Further, the FCA believes investors should make an active choice to be invested in cash.
- One-year charge figure in key illustrations provided to savers so they can compare costs. The FCA found charges vary from 0.4% to 1.6% between providers and can often be complex.
- It’s not ruling out introducing a cap on drawdown charges where firms fail to introduce ‘investment pathways’ with appropriate charge levels.
- Comprehensive annual statements. Everyone who’s accessed their pension (whether drawing income or not) should receive details annually about charges paid and information on investment returns.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “We know 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’ve 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.”
Steve Webb, director of policy at Royal London, said: “The report shows that consumers who do not take financial advice are at risk of losing out, with 94% not shopping around at retirement. The biggest risk is not consumers running down their pension pot too quickly – for which the FCA says ‘it has not seen much evidence’ – but savers locking their money into low-return cash investments for decades. Making sure savers do not sleepwalk into cash investments is an important step, as well as simplifying choices for savers at retirement.”