The FCA has acknowledged the reduction in the lifetime allowance may be causing higher earners to invest in riskier assets and could reduce their long-term savings incentives.
The regulator published for the first time today its sector view on the pensions and retirement income market.
The FCA notes while there have been efforts to encourage pension saving such as auto-enrolment, tax allowance reductions may have led to behavioural changes among higher earners.
It says: “Although consumers are being encouraged to save at the accumulation stage, changes to the tax treatment of pension contributions for higher earners, including the reduction in the lifetime allowance, may lead to alternative investment strategies becoming more attractive to these consumers or removing the incentive to save long-term.”
The regulator adds the move to alternative assets has been compounded by providers pulling out of the annuity market.
It says: “On the supply side, we have seen some providers exit the annuity market because of a variety of factors included increased capital requirements, move to asset management business models and falling demand following the Government’s pension reforms.”
The regulator backed the value of advice to navigate an increasingly complex pension environment.
The FCA says: “The Government’s pension reforms have increased the complexity of the decisions consumers need to make at retirement. This means an increasing number of consumers will need support and guidance, but may not be willing or able to afford traditional forms of advice. If demand for advice grows faster than supply, some of the most vulnerable market participants may be left without access to adequate advice.
“Poor decision-making at decumulation may lead to consumers running out of funds, particularly given the trend to enter drawdown without advice.”
But the FCA also challenged advisers to help consumers get a better picture of the cost of their services.
It says: “Consumers may be unable to assess value for money because cost information is not disclosed, or is difficult to understand. It is vital that cost information is clear to consumers during accumulation and in decumulation.”