Regulator unveils plans to save retirees £25m
The Financial Conduct Authority (FCA) estimates that these changes could benefit those approaching retirement by up to £25m a year.
The measures include providing people with ready-made investment solutions, described as ‘investment pathways’. The FCA hopes the investment pathways will help 100,000 customers who enter drawdown each year without taking advice.
These people may plan to take a variable income from their pension and are likely to have taken advantage of the pension freedoms, which allow individuals aged 55 and over access to their pension to invest or spend it as they wish.
Under the FCA’s proposals, individuals will choose from four objectives for their retirement pot – and will be offered a solution based on their choice. These will be based on four retirement scenarios covering the following:
- Plans to touch money for five years
- Plans to set up an annuity within the next five years
- Plans to start taking a long-term income within the next five years
- Plans to withdraw all their within the next five years
Providers will be given some flexibility to determine the asset allocation suggested within each investment pathway.
The City Watchdog hopes that financial services business will provide competitively priced solutions and if they don’t, a pricing cap may be introduced later down the line.
The FCA has also proposed that firms provide consumers with warnings about holding investments in cash, as well as preventing pension investments from defaulting automatically into cash savings – unless an individual chooses to do so.
The regulator has decided to proceed with plans for firms to provide individuals with so-called ‘wake up’ packs four to six months ahead of retirement. The intention is to inform them about the retirement options that are available to them and to let them know that free guidance is available from Pension Wise. They will also receive information about annuities and their eligibility for enhanced annuities. Wake up packs are set to be introduced on 1 November 2019.
Individuals will also receive more detailed disclosure on charges from pension providers. Meanwhile, the FCA is consulting on proposals to provide consumers with information on the actual charges they have paid on their pension pot over the year, expressed as a cash amount.
Christopher Woolard, executive director of strategy and competition at the FCA, said the proposals have been made following the regulator’s ‘Retirement Outcomes Review’ in the summer. This concluded that many consumers are focused only on taking their tax-free cash and tend to take the ‘path of least resistance’ when entering drawdown.
“We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. This leads to poor consumer outcomes,” he explained.
Will the measures help retirees?
Tom McPhail, head of policy at investment platform Hargreaves Lansdown, explained: “The FCA was presented with a huge regulatory challenge when the former chancellor tore up the retirement rule book in 2014. The pension freedoms have bedded in and are working well but this review has rightly identified more can be done to help investors make the most of their retirement savings.”
He believes the retirement pathways will be “immensely helpful” for investors who lack the experience and confidence to tailor their retirement investment strategy to meet their changing circumstances.
Tom Selby, senior analyst at investment platform AJ Bell, noted that in order for the proposals to be successful, the investment pathways will need to be able to match the needs of consumers selecting each of the four retirement scenarios.
“At the moment, the proposal is for providers to have to offer just one investment pathway for each scenario. However, the retirement scenarios are very broad and it is difficult to see how one investment option is going to be able to cover the myriad of needs and risk levels of all the people selecting each scenario,” he added.
If savers are shoehorned into four categories with just one investment solution per category, he believes there is a risk that some people end up in retirement income solutions that do not meet their requirements.