The FSA is concerned about potential drawdown misselling as annuity rates tumble and Solvency II pushes investors towards alternative retirement products.
The regulator’s retail conduct risk outlook, published this week, sets out what it sees as the most significant risks in the retail investment market.
It says the removal of the requirement to annuitise pension savings by the age of 75, lower annuity rates and Solvency II potentially increasing the cost of annuities all mean alternative decumulation products are likely to become more popular.
The FSA says these products pose additional risks to consumers than those posed by traditional annuities, including the capital value of the fund being eroded and returns being less than those shown in illustrations and annuity or scheme pension rates falling in the future. It adds that high levels of income may not be sustainable when maximum withdrawals are taken under capped drawdown or when a short-term annuity is bought.
It says: “These factors increase the potential for misselling drawdown as advisers are likely to need to consider other variables such as capacity for loss that are not typically considered when an annuity is purchased.”
Yellowtail Financial Planning managing director Dennis Hall says: “Any responsible IFA has always known those risks apply to drawdown products.”