The FSA has highlighted potential drawdown misselling concerns as tumbling annuity rates and Solvency II push investors towards alternative retirement products.
The regulator’s retail conduct risk outlook, published today, highlights the increased risks facing savers who choose to enter drawdown rather than purchasing an annuity when they retire.
It says: “Traditionally, consumers in then UK have purchased annuities at the point that they reach retirement. However, the Government has now removed the requirement to annuitise pension savings by the age of 75.
“Furthermore, low current gilt yields mean lower annuity rates and Solvency II may further increase the cost of annuities and reduce their attractiveness.
“As such, there is increasing likelihood that alternative forms of decumulation products will become more popular.”
The FSA says investors who move into drawdown risk seeing the capital of their fund eroded, investment returns lower than those shown in illustrations, and lower annuity or scheme pension rates in the future.
The regulator also says high levels of income may not be sustainable when maximum withdrawals are taken under capped drawdown or a when a short-term annuity is purchased.
The FSA says: “These factors increase the potential for misselling income drawdown products, as advisers are likely to need to consider other variables (capacity for loss, risk, higher costs, etc) that are not typically considered when an annuity is purchased.
“Consumers have the potential to suffer detriment if they are sold an income drawdown type product when an annuity would have been more appropriate to their circumstances. This risk has the potential to affect all those people entering retirement in the near future.”