Legal & General, one of the UK’s biggest annuity providers, has warned Chancellor George Osborne his radical pension reforms risk being rendered ineffective unless the FCA relaxes its regulatory approach.
Osborne announced a fundamental overhaul of pension tax rules in his Budget speech last week. The changes will mean that anybody who is aged 55 or over will be able to take their entire pension pot as cash from April next year.
Osborne said: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.
“No caps. No drawdown limits.
“Let me be clear. No one will have to buy an annuity.”
However, L&G pensions strategy director Adrian Boulding says current FCA rules mean most customers are “shepherded” into buying an annuity rather than being exposed to investment risk through drawdown.
He says: “This is the second time George Osborne has abolished the requirement to buy an annuity, and even before this Government Gordon Brown abolished the requirement to buy an annuity when he introduced alternatively secured pensions.
“But whether or not anything actually changes will depend on how the FCA behaves.
“Before the Budget nobody had to buy an annuity but the regulatory bias in the system shepherded the vast majority of people into annuity purchase.
“We will only see a change in customer behavior if we get a change in the regulatory regime and the noises coming out of Canary Wharf.”
Following Osborne’s Budget announcement pensions minister Steve Webb suggested the Government is “relaxed” about people running down their private pension fund and living on the state pension.
Boulding says this attitude will need to be replicated by the FCA in order to change retirement income buying patterns.
He says: “Steve Webb has said if someone wants to buy a Lamborghini and live on the state pension then the Government is quite relaxed about that.
“We need the regulator to be equally relaxed. If we put somebody into an accelerated drawdown product there is a risk that in 10 years’ time they will have run out of money and are on the bread line and can claim against their adviser or provider.
“At the moment we don’t even do capped drawdown without advice. We just do not want that regulatory risk on our balance sheet.
“We will need to get the regulator to tell us very clearly what are the risk warnings we need to get across to the customer and on what basis can we write business if the customer ignores them.”
Informed Choice managing director Martin Bamford says: “The Budget reforms were rushed through and we are now starting to see the potential problems emerge.
“Just because the Government is allowing everyone to go into flexible drawdown doesn’t make it a good idea. You have to ask how the FOS will treat complaints or what your PI insurer will think if you start writing 100 flexible drawdown cases a month with small funds.
“Advisers are not going to suddenly switch from annuities being the main option to flexible drawdown, and providers in the main want advisers to take responsibility so they are not going to accept the business without an adviser standing behind it.”