Panel alert over ‘toxic’ pension products set for launch

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A raft of “toxic” pension products may come onto the market when radical pension freedoms come into effect next April, according to the Financial Services Consumer Panel, which also voiced concern over a boom in self-invested savings vehicles.

Sue Lewis, FSCP chairwoman, said that she was concerned that some of the products which will come to market may be unsuitable, in particular new drawdown products. “Drawdown on the whole isn’t very good for people who don’t have a lot of money,” she added.

Moreover, she explained that the panel has been worried about the type of people who will be buying self-invested personal pensions as a result of the pensions liberalisation.

Sipp guru John Moret previously told FTAdviser that he expects the Sipp market to double in size adding £150bn in assets by 2017, due to the new pension flexibilities.

Others have predicted an explosion in product innovation, especially in ‘blended’ products that are based around drawdown flexibility but that offer some guarantee.

Speaking to FTAdviser, Ms Lewis said: “We published our paper on annuities last November and we called for all sorts of changes to the annuities market and got a little bit more than we bargained for.

“There is some very good news in that [the abolishment of annuities] because there is more choice, but there is also a lot of risk so there is kind of a disconnect because the government is now busy auto-enrolling people into pensions.

“So people will go, ‘I’m saving in a pension’ and... it’ll just look like a tax from their pay slip for some and then suddenly wham, they get to 55/60 and suddenly have to make a whole load of really complicated decisions.

“The immediate risk is that all sorts of products will come on the market that are just quite toxic, or are not very good for consumers because drawdown on the whole isn’t very good for people who don’t have a lot of money.”

Ms Lewis added that the panel have concerns that there may be some drawdown products that “are not very transparent”, especially in terms of costs of underlying investments which “are really quite high if you have got a small pot”.

She added: “There may be all sorts of products. We’ve been worried about Sipps as well and people being encouraged to put their pension pot into a Sipp. And of course its quite hard to know what the industry will come up with in terms of drawdown to be honest, but we don’t think it will be necessarily good for consumers.

“We don’t really know what is going to happen and what sort of products will emerge but the Financial Conduct Authority needs to keep a close eye on it.”

Alongside these concerns, Ms Lewis defended the position of annuities in the market and suggested that paradoxically annuity providers may become more competitive as a result of the changes.

“For a lot of people an annuity will still be a good product. A lot of people have fundamentally failed to understand that an annuity is an insurance product [...] the point is that it guarantees you an income for life, so it is an insurance product rather than an investment product.

“Hopefully the existence of other products in the market place should make annuity providers actually think a bit more about value for money and efficiency so paradoxically this might put pressure on the annuities market to sharpen up and be better for providers.”