One third enter drawdown without taking advice

13 July 2017

Savers are risking high charges and poor returns by not taking advice when they come to retirement, according to a new report by the City regulator.

A worrying review by the Financial Conduct Authority (FCA) found almost three-quarters of pension pots are accessed by savers aged under 65, evidence that tapping into retirement savings has become ‘the new norm’.

In addition, another concerning finding is that almost a third of pots are being moved into drawdown without any advice being taken. Prior to the pension freedoms, which were introduced in April 2015, the proportion of pension savers forgoing advice prior to entering drawdown stood at 5 per cent.

This has raised concerns that consumers are not shopping around for a potentially better deal, and are instead simply sticking with their existing pension provider.

In order to address this issue the FCA hinted it may intervene in the future, stating that it will gather further evidence to assess whether ‘additional protections’ should be put in place for pension savers who enter drawdown without taking professional advice.

‘Drawdown is complex and these consumers may need more support and protection,’ notes the FCA.

The City watchdog adds that it will look into ‘whether consumers pay high charges and have ended up with unsuitable investment strategies.’

The watchdog also raised the alarm that a lack of competition in the industry and a distrust of pensions could see millions of savers make bad decisions at retirement.

It comes as new figures show that 53 per cent of all pension pots have already been fully withdrawn by savers – some nine in ten of these were worth £30,000 or less.

The regulator said savers risked paying too much tax as the majority opted to take their pension pot as a lump sum rather than withdrawing smaller, regular amounts.

It said twice as many pension pots have been moved into drawdown as annuities become increasingly unpopular, and more than half of pots being accessed were moved into other savings or investments.

Two years on from pension freedoms -  the common pitfalls

It has been two years since new pension freedoms rules were introduced, which gave consumers more say over what happened to their retirement savings.

Now the FCA said it is looking into possible measures to encourage consumers to shop around for the best deal at retirement and to take financial advice.

Christopher Woolard, executive director of strategy and competition at the FCA, said: ‘We have identified areas where early intervention may be needed. Ensuring this market works well will required co-operation across government, regulators, the industry and consumer bodies.’

But many experts say the FCA’s suggested proposals, which include introducing protections for savers who do not take financial advice, do not go far enough.

Jon Greer, head of retirement policy at Old Mutual Wealth, says: ‘Today’s data shows that consumers simply cannot afford not to take advice at the point of retirement.’

He adds savers who moved their pots into Isas, buy-to-let or cash savings accounts risked ‘disastrous long-term consequences’.

‘Taking a lump sum in a single tax year is likely to result in paying more income tax than withdrawing money gradually. And savers are giving up future tax-free investment growth in a pension in exchange for comparatively low-growth assets like cash or illiquid property.’

It comes as figures from the Office of National Statistics found almost half of people think property is the best way to make money for retirement, compared to just 20 per cent who favoured pensions.

Greer adds: ‘Pensions are suffering an image problem. But modern pension products offer competitive charges, a range of investment options, liquid investments and the protection of the Financial Services Compensation Scheme.

‘Trust in pensions is a major issue, and the regulator and the savings industry must do more to understand why some members of the public are fearful of them.’

Research by LV= found that one in five savers who didn’t take financial advice when they retirement are worried they might regret it in the future.

John Perks, managing director of Life and Pensions at LV=, said: ‘Professional financial advice is by far the best way to ensure people are able to make the right decisions at retirement, but too few people take it up.’

This article was written for our sister magazine Money Observer.

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