New pension rules to prevent retirees from making poor decisions proposed by regulator

28 January 2019

The financial watchdog the Financial Conduct Authority (FCA) has launched a consultation on new rules that aim to stop retirees from making poor decisions about how they invest their pensions.

As many as 100,000 over 55s go into income drawdown every year without seeking financial advice, according to the FCA.

Almost a third of those following this path between October 2015 and April 2017 had invested their retirement savings wholly in cash.

The FCA has previously expressed concerns that many consumers who do not seek advice 'sleepwalk' into income drawdown and hold their retirement savings in investments that do not meet their needs.

This means retirees may not be able to generate the level of income they need or find that they run out of money.

By adopting a more appropriate asset allocation - spread between equities, bonds, property as well as a small amount of cash - it says retirees could boost their pension income by 37%.

As part of its proposals the FCA wants pension companies to offer non-advised retirees four ready-made investment solutions, so-called 'investment pathways,' depending on the financial objectives for their savings.

It also wants to scrap cash as the default option for those who do not specify where they want their money to be invested when they move into drawdown.

Christopher Woolard, executive director of strategy and competition at the FCA, says: “Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the 'path of least resistance’ when entering drawdown. 

"This can often mean that the rest of their drawdown pension pot is not invested in a way that meets their needs and intentions. 

"We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. This leads to poor consumer outcomes."

The four pathways outlined by the FCA are:

  • Those who do not plan to touch their money in the next five years
  • Those who plan to buy guaranteed income with an annuity in the next five years
  • Those planning to take long-term income from their pension within the next five years
  • Those planning to cash in their whole pension within the next five years

Mr Woolard adds: “Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement.”

Tom McPhail, head of policy at Hargreaves Lansdown welcomes the proposals. “The retirement pathways will be immensely helpful to those investors who currently lack the experience and confidence to tailor their retirement investment strategy to meet their changing circumstances.

"The pathways also place a significant duty of care and responsibility on providers to present suitable solutions to their customers.”

However, Tom Selby, senior analyst as Sipp provider AJ Bell, cautions it won’t be easy to build generic pathways that work for every customer.

He says: “The key will be on ensuring the investment pathways are capable of matching the needs of consumers selecting each of the four retirement scenarios. At the moment the proposal is for providers to have to offer just one investment pathway for each scenario. 

"However, the retirement scenarios are very broad and it is difficult to see how one investment option is going to be able to cover the myriad of needs and risk levels of all the people selecting each scenario.

“Although these pathway options will not be the default for savers, there is a clear intention to nudge consumers towards these options.

"In attempting to shoehorn savers into four categories with just one investment solution per category, there is a risk some savers could end up in retirement income solutions that do not meet their requirements.”

To help consumers prepare for retirement planning the FCA has also proposed improvements to pension ‘wake up packs’ sent out by pensions firms in the run up to retirement. This will include the removal of any marketing material to increase its impact.

When consumers go into drawdown arrangements, key features illustrations will also be improved to give more prominence to charges.

Mr Selby adds: “Retirement wake-up packs are long overdue radical reform and today’s announcements represent a step in the right direction. Allowing savers to compare what they pay in pounds and pence on a single A4 sheet of paper is the right approach, as is getting this information to people at 50 rather than 55.”

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