The FCA has clashed with the Treasury over new pension freedoms after the regulator highlighted the risk of drawdown for those with pension pots worth less than £50,000.
From next April, anyone aged 55 or over will have access to their entire pension pot, potentially bringing drawdown to the mass market.
The Treasury has been loudly promoting the new freedoms as making pensions like a bank account and handing savers total flexibility over how they spend their pot.
But speaking at the Taxation of Pensions Bill committee hearings last week, FCA head of investment David Geale said drawdown is “unlikely to be suitable” for pots under £50,000. He later suggested the regulator’s stance could evolve over time.
In parliament, 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. Under the current regime, there is a limit to how much people should have before they go into those products.”
While the FCA insists it has no intention of imposing rules around minimum pots for drawdown, the seeming mismatch between regulation and Government policy goes to the heart of the bombshell pension freedoms announced in the Budget.
Industry experts have expressed concern over the mixed messages and questioned whether the “clueless” FCA is ready to deal with new pension freedoms.
A senior source at a major insurer says: “It was a stupid comment [from Geale]. This idea that there should be an arbitrary limit of £50,000 or whatever is just ridiculous. It suggests the FCA doesn’t know what it is talking about.
“The regulator is not with the script and is living in a past time. It does not have a clue about where the world is moving to. It is always the same with the FCA – it is always a million miles behind the track and it is behind again. It is just clueless.
“I don’t think it is prepared for these changes – it has been caught off-guard. It is still off-guard and under-prepared.”
MGM Advantage pensions technical director Andrew Tully says there is a mismatch between consumer expectations and the FCA’s approach to drawdown.
He says: “We have the Government saying one thing and the regulator saying something different. The Government says anyone can have drawdown and the regulator doesn’t quite agree.
“There is a difference in customer expectation from what will actually be delivered. Some customers who have £30,000 are expecting to go into drawdown, but they could go to an adviser who advises them not to go into that product because of what the FCA has said.
“It’s a mismatch and similar to the situation around pensions being treated like bank accounts.”
Hargreaves Lansdown head of pensions research Tom McPhail says the regulator’s position must shift by next April.
He says: “The FCA default position historically has been that drawdown is risky and annuities are safe. Clearly we are having to evolve from that.
“We need to move away from the notion of drawdown suitability being defined by pot size. I am sympathetic to the FCA position but, with the new freedoms, it is not about pot size any more.”
It is not the first time the regulator has raised concerns. In an unpublished 2012 thematic review into income drawdown advice, seen by Money Marketing through a Freedom of Information request, the FSA described drawdown as “inherently risky” where only a “high-risk strategy” could produce sustained levels of income.
It also expressed concerns over the “potential new risk” from abolishing compulsory annuitisation for the over-75s in 2010 – reforms that were far less radical than those coming into force next April.
Providers reject the FCA’s concerns and are rethinking their drawdown offerings dramatically, including facilitating drawdown for savers with pots below £50,000.
Since the Budget, Standard Life has offered drawdown on pots above £30,000 and denies they are “unlikely to be suitable”.
Standard Life head of pensions strategy Jamie Jenkins says: “We are moving drawdown to the mass market, which requires a scaling up of the process and an easing of the limits. Our limit is £30,000 – we amended that when they raised the trivial commutation limit in March.
“Beyond next April, all bets are off and we could do it for anyone. We don’t believe it is unsuitable as we have dropped our limits to £30,000.”
Legal & General is still selling drawdown as an advised product and is working on a facility to allow consumers to make a series of cash withdrawals over a number of years in order to reduce their tax burden.
L&G pensions strategy director Adrian Boulding says: “Post-April, we expect to see a lot of people who have historically bought an annuity wanting to do something quite different. In particular, it will be the group with some final salary pension. There are a lot of people with final salary pensions, probably from a previous employer. Those are the people who have secure income and they will want to do something different with the defined contribution pensions accrued in later years. It may be less than a £50,000 pot.
“We will be looking to open a suite of products to them. Some will take financial advice and some will just take the guidance. We will be relaxing our historic requirement that drawdown is only advised so we can access these new people.”
With the FCA focused on the guidance regime and its annuity market study, some fear it will not be ready to regulate the market from April 2015.
“The FCA does not seem to be on the ball for the wider advice that needs to be given around annuities versus drawdown and how those two interact, or even equity release and deferred state pension,” a senior industry source says.
“It fundamentally changes how you think about structuring your income but the FCA does not seem to be at the races at all about any of it.”
With a flexi-access drawdown account you don’t need to limit what people take.
The reason people were told not to go into drawdown under £50,000 before was partly to do with high charges.
Under the capped drawdown system you needed ongoing advice but now, without the need for ongoing advice, the charges should come right down.
I’m not sure what the difference will be between a pension pot and a building society account or an investment bond.
What the industry hasn’t got its head around yet is that this is a new world with real flexibilities.
Yes, it’s a pension but it doesn’t have the kind of restrictions that capped drawdown has.
If you are not doing anything complicated, such as a passive tracker and an income fund, then why should it cost a lot of money? Why should it cost any more than any other account you might have £5,000 or £10,000 in?
Drawdown could be used by people with other final salary pensions or those still working.
There could be more mixing of annuities and drawdown, such or buying an annuity later when you have a health issue.
Savers could only put some of their money into annuities so they can manage different types of risk in retirement.
Ros Altmann is an independent pensions consultant and the Government’s adviser on older workers
Martin Bamford, managing director, Informed Choice
There is a lack of joined up thinking on pension reform. It is wrong to place mandatory figures on suitability, it is about what is right for the customer. There are people for whom drawdown will be suitable. There are always circumstances where you look at other assets or risk profile, rather than just the sum of money involved.
Simon Webster, managing director, Facts and Figures
I totally disagree with the FCA. It is a complete no-brainer to take the cash rather than a small income, so it is being stupid. As ever, this is people in ivory towers making pronouncements about things they don’t understand.