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FCA: Drawdown ‘unlikely to be suitable’ for pots under £50K

The FCA says income drawdown is “unlikely to be suitable” for pension pots under £50,000.

Speaking at the Taxation of Pensions Bill committee hearing this week, FCA head of investment David Geale said currently drawdown risks and charges made it poor value for money for pots under £50,000.

The FCA says it is not planning to set rules around drawdown limits and argues it is for advisers and providers to determine the suitability of products for customers.

The FCA says most providers offer drawdown for pots above £100,000 but they are free to set their own levels.

Standard Life changed its drawdown rules after the Budget and is now offering it to anyone with more than £30,000 in their pension pot.

In Parliament, Labour MP Pat Glass said: “Is there a level of pension savings below which flexi-access drawdown products are unsuitable because of the increased charges and the investment risks?”

Geale said: “We previously said that for customers with under £50,000 in their pot it was unlikely to be suitable to access drawdown under the current product range.”

When asked if that meant there are unsuitable levels, Geale replied: “Yes, under the present range of products. But there is no reason why over time flexible access products need to be poor value for money or to represent a high element of risk: it is about people understanding what they are getting into.

“We will have to see how the market develops to answer that question fully. As I say, under the current regime there is a limit to how much people should have before they go into those products.

“Over time we will see how the market develops. Equally with the new freedoms, like the ability to access the uncrystallised lump sum and because of those different things that are available and the different ways people can access their money, you would expect to see competition take effect in that market as well. So we might hope to see charges come down over time.”

In the same session the Financial Services Consumer Panel raised the alarm about non-advised drawdown sales, claiming it would leave customers without a route to redress.

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Comments

There are 24 comments at the moment, we would love to hear your opinion too.

  1. Whilst in the main smaller pots are not suited to drawdown, maybe under the new rules someone with a pot of £40,000 and no other income would like to take out £10,000 per annum over 4 years to use up personal allowances?

  2. Fantastic. So if I have a client who will only receive the state pension plus benefits from his £40,000 DC pension in retirement then I should advise him to buy an annuity. I should completely ignore the death benefits (which stand to improve even further under drawdown), flexibility, terrible annuity rates on offer at the moment (which aren’t expected to change for some time).

    The FCA does not live in the real world on issues like this. They speak of the “risks” of drawdown as if every client will abuse their fund as much as possible, invest in the riskiest funds possible and put all their money in a SIPP with £400 fixed annual charges. They completely ignore the very real risks of purchasing an annuity at a terrible rate (which can’t be amended outside of the cancellation period) and then living on a low income for the client’s remaining years, then leaving the remaining fund with the provider rather than their loved ones. That is a real risk. A steadily depleting retirement fund over a 20-30 year retirement is not a risk, it is an eventuality.

  3. One could say ‘this is silly’ really. If the ‘industry’ is constructed cost effectively, why can’t smaller investors preserve this wonderful new pension investment pot and use it to suit their circumstances to their optimum advantage?

    It is almost as if the regulator might say an ISA of less than £15,000 is uneconomic for a client as the cost to the client of the advice make it not pay….

    Are not some of these judgements down to the individual adviser and the client and not the regulator to issue an ‘edict’?

  4. Where do they find these people? All the recent pension changes could have been made much simpler. All Boy George had to do was to increase Triviality from £18k to £50k – job done.

    While in pure definition terms this bloke is right – that isn’t the issue. These people with this size of pot will take the TFC and then take the rest of the fund in cash. That’s what Osborne wants – accelerated tax revenue. These people will take ‘guidance’ not advice. All they will want to know is how quickly they can grab the cash.

  5. I agree with the above comments, drawdown is an option for all clients just as annuities are. All options should be considered in relation to an individual set of circumstances. This is where “simplified” advice could fall down. A provider coming up with a new automated D2C proposition may build in a rule such as “Drawdown is not offered to pots of less than £50k” simply because the FCA made a comment such as the above.

    Reading between the lines i also notice a comment that Mr Geale made regarding the development of the FAD market, which was “Over time we will see how the market develops.” For me this sums up the FCA attitude and one of the main flaws of the regulator. Should the market develop in a way that they do not deem satisfactory they will launch a review and it’ll be all over the press that the industry is ripping off the public. Cue bad press and the merry-go-round of bad public feeling directed at the financial services industry.

    The FCA should not be waiting to see how a market develops, they should know enough about how the market they regulate works in order pre-empt issues. Until that point they are always going to be a reactive regulator and not the truly proactive regulator that we all want and the FCA is claiming to be.

  6. I have to admit to a smidgen of sympathy for the regulator here!

    The FCA is always being asked to be more specific re what is likely to constitute good advice and, rather than sheltering behind the stock ‘you tell us what good advice looks like’, they’ve had a stab at it here.

    So long as the world of Compliance doesn’t insist that the statement means no pot under £50K can ever be allowed to be used for drawdown, I’d agree that generally pots that size will represent an excessive risk for most people.

    I’m not too worried about the hassle of getting the odd drawdown case agreed for the occasional educated client who knows what (s)he’s doing, and has an intelligent plan – I’m much more concerned about the mass of idiots who now know that ‘all annuities are rubbish, and it’s now my right to take my pension exactly how I want to, so I’m going to blow it all over a couple of years and trust the state to provide for my long decline into subsequent sickness and poverty’.

  7. I’d love to know what charges he is referring to?

    I think he is using charges for SIPPs and basing it on research from the 90s

  8. You can tell that these guys have no real clue and that their knowledge is at least five years out of date. On most modern platforms, the additional cost of going into income drawdown, compared to a pre-drawdown fund, is between trivial (usually a fixed additional charge) and nil. Fidelity, for example, has no additional charges for drawdown. So if drawdown is too expensive for these funds then, er, so was having the pension in the first place.

    If an IFA’s knowledge of the market was as poor as this, the FCA would probably fine or ban him or her for never doing any research / CPD.

    And even if some drawdown charges may be disproportionate for a small fund, when you compare this to the huge potential cost of being railroaded into an annuity which you had no need for and forfeiting the entire pension fund… well, you could argue about apples and oranges all day, but the obvious conclusion is to thank God that people are being given the freedom to pay their money and take their choice, and not have their decisions made for them according to the outdated and incorrect worldview of FCA bureaucrats.

  9. Oh dear. Here we go again. I thought the FCA was the financial services regulator not a registered adviser.

    Please (FCA) sirs, let us get on with our jobs. Let us decide whether our clients should be entering drawdown, flexi access, buying an annuity, phasing, deferring or whatever. We are qualified, have experience in these matters and keep updated (CPD) adinfinitum. Most importantly we know our clients – what their needs and objectives are, their personal and financial circumstances – and we have assessed their attitude to risk (we know their capacity for loss, their tolerance for risk, their knowledge and experience of investments/pensions etc).

    I seem to recall (at the beginnings of income drawdown) the FSA then dictated that a certain pension pot size should not be suitable for IDD. Forgive me if I’m wrong but £100k springs to mind. On the flip side, if providers offered a product with a lower level of transfer value into its IDD product, as advisers we had to have taken that route into account, even if we knew that doing drawdown for, say, £10k was not realistic. The pensions arena has altered so much over the last 20 years.

    Dear FCA, please continue to set the regulatory boundaries (for advisers) and we will (as always) abide by those rules and execute our advice to the highest professional and ethical standards required. But, please do not tell us how to advise our clients.

  10. @ Sean – I couldn’t agree more. Just look at the charges of very one well known pension specialist (about to rebrand to their parent Company’s name). The risks are no different to pre-drawdown. This is simply the regulator dying something for the sake of being asked to speak at an event.

  11. They really haven’t got a clue have they?

    As to where they find them? Not in this world Harry!

    Whether or not the new rules are sensible is beside the point – they’re (nearly) here, and many people can and will want to access their small pots, perhaps over two or three years to minimise tax.

    Why should this be more expensive than say, an ISA, as Philip suggests?

    What ‘current range of products’ does this man think are too expensive for a fund of say £30,000?

    Leaving aside the regulatory risk, of these idiots coming back in 10 years with new criteria, this need not be a complicated or expensive transaction to carry out, with or without advice.

  12. @Nick Wardle
    @sascha klau

    I couldn’t agree more with both of you.

    @andy heath I have no sympathy for them. The potential outcomes of this are: A. Nothing might ever come of it. If pressed they will say “it is one person’s opinion and doesn’t reflect the views of the FCA. B. the regulator will immediately penalise anyone who in the past has recommended drawdown for clients under £50K. C. The regulator will do nothing for 2-10 years years then do a past review and then penalise anyone who has recommended drawdown for clients under £50K. It is this huge level of uncertainty that exists which makes our jobs virtually impossible. If I had a £40K client in this afternoon who is sold on the idea of drawdown and the benefits it can bring, do I now have to tell him I can’ help? Do I advise him to invest an extra £15K to make my file more compliant? Of course I don’t. I advise him properly, make him aware of the risks and then cross my fingers that the FCA don’t penalise me for giving suitable advice.

    We need a definitive yes/no answer of “Can we ever advise clients to use drawdown under £50K?” , otherwise the FCA need to accept that (if our files are good and the reasons for drawdown are justified and clear) our advice is suitable. Unfortunately it will never come to that. Some of us will be caught out with this in the next few months while the rest of us will be safe. In the meantime we just carry on, waiting for the next piece of semi-guidance to come from Money Marketing (not from the FCA directly mind, no official guidance from our regulator), safe in the knowledge that we have done right by our clients but apparently wrong by our regulator.

  13. I seem to recall not long ago reading criticisms from certain quarters that annuities represent poor value for money, not just because of the underlying rates but because, also, of hidden charges. The range/ choice of Income DrawDown products is changing almost daily, not least due to the increasing number of those incorporating a safety ratchet against falls in the value of the underlying asset pool. It is for advisers to make an educated judgement call as to which particular Income DrawDown product is likely best to suit the circumstances of each particular client.

  14. I think what he is saying is for small pot clients surely there are a fair number of options other than drawdown which will cover many of the bases and it is important to document that these were all considered before recommending drawdown as most suitable.

    E.g.

    Annuity, it may not be right for many clients but it must be considered.

    If they are aged 60 or over and total pension savings amount to £30,000 or less, they can take the entire amount as a cash lump sum under ‘trivial commutation’.

    If they have small pension pots of £10,000 or less they can take up to three of these as a cash lump sum. They can do this even if their total pension savings exceed £30,000.

    Uncrystallised funds pension lump sum (UFPLS) from uncrystallised funds, 25% of the lump will be tax-free, the remainder will be taxed. And obviously this isn’t drawdown.

    He also said it was unlikely “under the current product range”. This implies it may be in some cases and the future product ranges may offer better value.

    Surely the answer is, as always, it depends and one size can’t fit all. I will be doing what I always did, seeing what is best for the client and implementing it.

  15. So, we needed to develop a new product, lets call it Pension Open Operations or POO for short. This plan is for small pots up to £60,000.

    How it works is you can take your pension lump sum totally in one lump or as part of an agreed income each year for tax efficiency. Its not draw down mind you, its a new type of product. It looks like draw down, phased draw down or fixed term annuity, but its not its a new cheaper charged contract with set outcomes and reduced charges. POO is the new wave of open and flexible pension regulated and guaranteed by a new body called Secure Holistic Investment Trust or S.H.I.T. POO and S.H.I.T will cost the industry millions to develop, the new governing body will of course need highly paid executives who have had nothing to do with the financial services industry, know nothing about advising, but have the essential degree in Art and History and run other very well unknown operations.

    Give us all the strength to be able to educate those making the decisions as clearly they no not what they do. May be it should become a requirement that all these decisions makers should spend a month working as an adviser at the coal face. This should be either in Wales or up North advising on pensions pots of £35,000. May be, just may be they would then understand our frustrations.

    Blanket statements do not help anyone and feed the Ambulance chasing claims companies who are gearing up, willing and very able to challenge any advisers recommendations.

  16. There are products on the market that offer a guaranteed income for life with access to the fund if necessary.

  17. Another scenario…. or two.

    a) FOS starts upholding annuity claimants who banked their small (or big..) pots at the trough of annuity rates – and in the face of much higher contemporary rates at the complaint time then of course and a healthy dose of inflation). Wholesale miss-selling because advisers failed to say that annuity rates were at all-time lows and thus were likely to go up significant;y and well, the pensioner had many years in front of him.

    b) Markets go ‘wrong’ (however interpreted) and the FOS upholds all claims by small investors with pension pots under £50000 because even the Regulator said that was not good advice regardless of circumstances.

    Which risks do we advisers wish to take and yes, why is an ISA less ‘risky’ and lower in cost to advise?

  18. I agree with the above comments particularly about that place 200 miles North West of FCA HQ (The North for those at HQ without a degree in Geography), The suggestion to raise triviality from £18,000 to £50,000 is all well and good but depending on any income earned in the tax year when the person retires they could pay Higher rate tax on all or part of it after TFC. In a worst case scenario, someone under state retirement age with no other income could find them paying HRT in one year and being a Non-Taxpayer beyond.

  19. Does this also mean that there’s no point investing money unless you have £50,000 or more given that post April, 15 the expectation is that a pension in drawdown is essentially like an ISA being used to supplement income – ergo why the £50k threashold?

    The world is so much more complicated than having such a threashold but statements like this was what many hang on to.

  20. The FSA guide in 2002 I think it was said that drawdown under £100k was unlikely to be suitable. The smallest I have done is about £20k however as there are exceptions to everything. I’ve just doen a £30k flexible drawdown )moved from drawdown as when we arranged his Living Time plan, his secure income was under £20k, it is now over £25k and the flexi ddown limit has come down to £12k, so he’ll exhaust his flexi ddown by the end of April after having made an informed decision.

    As for David Geale – His CV says he was an adviser for Lloyds TSB (Blackhorse Life) for a VERY short period of time. One wonders 1. What actual professional qualifications he has (did he do FPC even, BIOB exams or what) and 2. If there are any advisers who worked with him who have tales to tell……

    The bank staff when I was at NatWest who got seconded to the pensions review and then ended up working for the then PIA were all failed sellers. I remember one who the pension review said the client should opt back in to their employer’s scheme )I wasn’t the seller as I was never authorised to advise on occupational scheme transfers) and he couldn’t even convince the client that the compensation and opting back in made sense!

  21. I’m sure David Geale means well but….

  22. He spent all of 6 months as a ‘trainee’ adviser’ before joining the FSA/FCA and he’s now the Head of Investment and thinks he knows what is best advice?

  23. @Sean – Are you sure it was as short as that? I thought he was a mortgage adviser before being a financial adviser, before joining the FCA? Perhaps MM know.
    There is a saying isn’t there…. those who can do and those who don’t……… what was the last bit… can’t remember…. was it regulate?

  24. John Charcol mortgages.

    This is the man who asked someone if he thought BTL was an investment…

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