The two largest assets an individual is likely to own are their house and their pension fund.
While downsizing a house in later life might be an option, releasing the assets from a pension to provide an income for life is a long-term strategy.
With this in mind, it is reassuring to see the FCA focus on the impact of the options introduced by the pension freedoms in 2015.
The regulator’s retirement outcomes review was launched in July 2016, as previous work had identified several issues that might be both occurring and reoccurring.
Its recently published interim report makes for interesting reading, although there are not too many surprises. It highlights a number of issues including early access being the new norm for pension investors, with most under-65s opting for lump sums rather than regular income.
Over half of these pension pots were fully withdrawn. However, these were mostly small, with 90 per cent below £30,000, and 94 per cent of consumers making full withdrawals had other sources of retirement income in addition to the state pension. Drawdown has also become much more popular, with twice as many pots moving into it than annuities.
The FCA has identified five key issues for concern:
- People are not spending the money they are withdrawing but moving it out of the tax-efficient pension environment into other savings
- Those accessing their pots early without taking advice typically do not shop around for the best deal, potentially leading to poor consumer outcomes
- Pension investors are increasingly accessing drawdown without taking advice
- With annuity providers withdrawing from the market there will be a lack of competition
- Product innovation has been limited to date
The regulator says further evidence gathering is needed to assess whether additional protections should be put in place for consumers who buy drawdown without advice. It has, however, ruled out compulsory advice.
In particular, it will be focusing on publication of charges and investment strategies. It also wants to improve competition in the non-advised drawdown market, potentially enabling consumers to access their savings early without having to make a decision about the remainder of their pension pot, as well as making it easier for them to compare and shop around.
The FCA would also like to see more tools and services to help the consumer understand their pension options more broadly, improving trust and building on existing initiatives such as Pension Wise.
These are all admirable improvements but when making financially life changing pension decisions, individual advice is essential. A recent report by the International Longevity Centre revealed people taking advice were £40,000 better off (although this referred to accumulation rather than a decumulation study).
Pension investors can give up so much by cashing in and withdrawing their whole pot or even moving from a defined benefit to a defined contribution scheme; losing benefits they are not aware of, let alone those of such a tax-efficient environment.
Product innovation is not necessarily the key, though. The products available, if properly understood, provide the tools most people will ever need.
It is the need for education that should be the highest priority. It is all about instilling more confidence in what is already a complex sector.
The final report is due next year and I would urge everyone to participate in it through the consultation. We need to work together and with the FCA to make the sector more efficient and provide better client outcomes.
Martin Tilley is director of technical services at Dentons Pension Management