A package of measures designed to engage people in their retirement planning has been proposed by the Financial Conduct Authority (FCA).
One of the regulator’s key recommendations is that ‘wake-up’ packs should be sent to customers from the age of 50 and then every five years after that.
Under current rules, pension providers are only obliged to send customers a so-called ‘wake up pack’ six months ahead of their chosen retirement date.
These new ‘wake-up’ packs will include a single page summary, sometimes called a ‘pensions passport’, which will include expected pension as well as specific retirement risk warnings.
Christopher Woolard, executive director of strategy and competition at the FCA, says: “We know that the choices introduced by the pension freedoms have been popular with many consumers. However, they’re now required to make more complicated decisions than ever before. Many people need more support when making choices.”
Default investment pathways to be considered
The FCA is also considering the introduction of default investment pathways for customers at the point of entering drawdown.
While people have largely welcomed the pension freedoms, some remain at risk of running out of money. For example, the FCA estimates that some drawdown customers could receive 37% more retirement income from their pot every year by investing in a mix of assets rather than cash.
The idea of default pathways, which was previously suggested by a select committee, could help to negate this risk but the pension industry might resist this proposal, because it creates more work for them, and because they might be liable if they put a person into an unsuitable pathway.
Transparent charges to be introduced
Further, the FCA proposes that firms include a one-year charges figure in pounds and pence to help consumers compare costs when considering drawdown. Currently, charges vary between 0.4-1.6 per cent across providers and they can often be opaque.
Alistair Wilson, head of retail platform strategy at Zurich, comments: “The simplification of drawdown costs is the right way forward. The FCA found 44 different charges consumers need to consider when in drawdown. These additional and sometimes unexpected costs can include charges for ad hoc withdrawals, receiving paper statements or when moving into drawdown.
“Having a single annual cost would be more transparent and help consumers to compare costs between different drawdown providers.”
Jeanette Makings, head of financial education at Close Brothers, adds: “Good communication is vital to help people make informed choices about their retirement and in particular their decisions around pensions.”
Given that defined contribution (DC) pension pots will grow significantly in the coming years, it is vital to give people the tools to be more actively involved in their retirement planning.
This article was first written for our sister magazine Money Observer.