IFAs have backed the need for advice on drawdown after an FCA review found that many non-advised customers are not acting on the information providers give them.
An FCA review into the non-advised drawdown market late last month found 37 per cent of customers go into drawdown, regardless of the options communicated to them.
Advisers have reacted cautiously to the study that assessed a sample of non-advised drawdown sales by firms covering approximately 74 per cent of the market by sales volume for the period from April 2015 to April 2017.
This included life insurers and Sipp operators and looked at all forms of communication, including written, telephone and online.
The FCA acknowledged many firms are offering online tools and calculators to help customers make informed decisions. However, some do not read information properly.
The FCA said: “As a general observation, firms provide customers with a large amount of information to help them make informed decisions. Customers do not always read this information when they access their pension savings.”
It adds some firms sold drawdown contracts and variations online or over the phone but did not send a hard copy of the product information at the right time.
The FCA says “this creates some risk of customers not understanding the consequence of entering into drawdown or moving from capped to flexi-access drawdown”.
Getting IFAs involved
The findings strengthen the case for advisers to guide savers through drawdown, experts argue.
Legal & General retail retirement managing director for individual annuities Emma Byron says: “We’re pleased that the FCA’s report concludes that firms are giving customers the correct information and fulfilling regulatory obligations.
“However, we’re concerned that customers are not always fully engaging with the information provided and the decisions they are taking. There’s also a danger that in only meeting the regulatory requirements, customers may not be made fully aware of all the risks they face.”
This concern is shared by Retirement Advantage pensions technical director Andrew Tully. He says: “Many more people are choosing to go it alone, but with this ability to dip into your pension like a bank account comes with many new risks, including paying too much tax on withdrawals, being scammed out of your money, taking on too much investment risk and running out of money before you die.”
An FCA data bulletin published earlier this month showed that 32 per cent of drawdown sales were on a non-advised basis between the freedoms and 2018.
This is up from 5 per cent before the launch of pension freedoms while, according to the FCA’s Financial Lives survey last year, 58 per cent of drawdown customers do not shop around and stay with their existing pension provider.
Tully says: “Freedom and choice has introduced a whole new layer of complexity which only serves to create confusion, so seeking guidance, and ideally getting proper regulated financial advice, will help to ensure your retirement dreams do not turn into a nightmare.”
What is most striking to Dunstan Thomas director of retirement strategy Adrian Boulding is what the FCA’s review misses about the complexity of drawdown.
He says: “The paper misses two big points, which is where should people invest and how much can they withdraw from their pot per month? Customers are not equipped to do drawdown themselves.
He adds that the FCA looks at choices as ‘and/or propositions’, meaning either buying an annuity or going into drawdown.
“What we really need,” he says, “is a blended solution that combines the features of drawdown and an annuity. The FCA as a regulator is focused on risk mitigation.”
Rowley Turton Private Wealth Management director Scott Gallacher says there are two points regarding drawdown an IFA can help a client with.
“The first is that clients will usually underestimate life expectancy and spend money too quickly. So people treat themselves when they retire, don’t invest properly, take the money out too quickly and wake up in their early 70s with very little.
“The second point is clients who have no concept of downside risk and picked funds accordingly. So people buy at the top of the market, there is a crash, they panic, sell at the bottom, move to cash and potentially lose half their pension pot.
“The idea of buying low and selling high seems to work in reverse when investors are left to themselves.”
The FCA says the findings from the review will inform its Retirement Outcomes Review, due to be published during the first half of 2018.
These findings and the Retirement Outcomes Review final report will also inform the FCA and The Pensions Regulator’s joint strategic approach to the pensions and retirement income sector, expected to be published later this year.k