A lack of trust in pensions is driving more than half of pots withdrawn through pension freedoms to be moved into other investments, causing individuals to pay extra tax, miss out on investment growth and other benefits says the FCA.
Publishing the interim findings of its Retirement Outcomes Review, the regulator says accessing pension pots early has become ‘the new norm’, with almost three quarters -72 per cent – of pots that have been accessed done so by consumers under 65. Most are choosing to take lump sums rather than a regular income.
Over half – 53 per cent – of pots accessed have been fully withdrawn, although the fully withdrawn pots are mostly small, with 90 per cent below £30,000, and 94 per cent of consumers making full withdrawals having other sources of retirement income in addition to the state pension.
Drawdown has become much more popular, with twice as many pots moving into drawdown as annuities.
But the Association of British Insurers says its evidence does not show that accessing pensions early is the new norm, and argues the still-evolving market is responding to consumer needs.
The review is the first major comprehensive study into how the retirement income market is changing since the pension freedoms.
The FCA says it will now gather evidence on whether consumers pay high charges and have ended up with unsuitable investment strategies.
It will also look at measures to improve competition in non-advised drawdown by asking Government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot, and ways to make it easier to compare and shop around for drawdown.
The FCA is inviting feedback on the initial findings and recommendations, and aims to publish a final report in the first half of 2018.
The FCA’s five key concerns with the retirement income market:
- Over half – 52 per cent – of fully withdrawn pots were not spent but were moved into other savings or investments. Some of this is due to a lack of public trust in pensions. This can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits.
- Consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around.
- Consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5 per cent of drawdown was bought without advice compared to 30 per cent now. Drawdown is complex and these consumers may need more support and protection.
- Providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition over time.
- Product innovation has been limited to date, particularly for the mass market.
FCA executive director of strategy and competition Christopher Woolard says: “Since the introduction of the pension freedoms, the retirement income market has changed substantially. This study looks at what has happened during this time, and gives us an early view of areas to keep a close eye on.
“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future. Ensuring this market works well will require cooperation across Government, regulators, the industry and consumer bodies.
“We will work closely with stakeholders to make sure we are clear on the actions we are best placed to lead.”
ABI director general Huw Evans says: “Our own data does not support the view that accessing pension savings early has become ‘the new norm’.
“Providers responded swiftly to the pension reforms, which did introduce considerably more choice for savers. The market and services are still evolving and the sector is committed to helping customers make informed decisions. Work already underway by the ABI and its members includes a project progressing ideas on how a flexible income drawdown comparison tool would work, alongside efforts to increase consumer engagement with pensions and create a ground-breaking pensions dashboard service. The report makes clear the importance of access to high quality advice and guidance, reinforcing how critical it is that the Government and FCA focus on delivering the objectives of the Financial Advice Market Review, and more.”
Hargreaves Lansdown head of policy Tom McPhail says: “This report looks like a regulatory cry for help; the FCA seems to be trying to put the pension freedom 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. They have 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. The FCA have also indicated they don’t want to force investors to take advice yet their proposals around default investment strategies appear in conflict with the Financial Advice Market Review conclusions. The government needs to engage with the challenges set out here and to look at how it can help savers and investors to make the most of their money. A savings commission to build consensus across industry and policymakers looks an increasingly good idea.”