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Retirement options under the FCA microscope

Danny Knight, head of investment directors at Quilter Investors, explains why the findings of the FCA’s Retirement Outcomes Review show there is still plenty of room for improvement in the decumulation investment market.

When pension freedoms were introduced in 2015, newspapers heralded the flexibility and choice suddenly available, while politicians celebrated liberating their constituents from the perils of the annuity market.

Britons were quick to embrace the reforms. In less than two years, flexible income payments totaling £9.2bn had been made from UK pension pots. This huge behavior shift at retirement provided the backbone for a new era of face-to-face financial advice. But crucially, it also presents some big challenges that are putting consumers at risk of sub-optimal retirement outcomes, according to a recent FCA report.

The surprise reforms were implemented at short notice by a Chancellor eager to secure support ahead of the 2015 General Election and took many by surprise. Like most seismic policy changes, while the positive benefits were obvious, they came with unintended consequences that take time to percolate.

Free ‘guidance’ has been introduced in a belated attempt to address knowledge gaps. Action is being taken against the threat of cold calling. And we have recently seen new rules on pension transfers.

But there are many other unintended consequences creating fires that need to be extinguished to protect retirees.

Time to review

The FCA’s recently published Retirement Outcomes Review illustrates how much catch-up is still required. It includes some startling discoveries about the behaviours, bias and attitudes of consumers in drawdown. More than anything else, its findings highlight that there are still plenty of challenges ahead.

Fear of loss

The FCA found that the single biggest driver motivating decisions was a fear of losing money. Over half (52%) rated it as “very important” in shaping their at-retirement choices and fewer than 1 in 10 said they felt it was not a major concern. “As long as it doesn't lose money, I will be satisfied” was the response of one individual surveyed on her investment choices.

Another retiree aged 65+ explained that they were concerned about investing “because I’m against gambling, always have been. I like to know that things are safe, things are in place.”


Perhaps as a result of this fear of loss, the FCA found that 1 in 3 non-advised drawdown customers are entirely invested in cash. In total, the regulator estimates 50,000 are exclusively holding cash in flexible drawdown, while we estimate that 10% of all retirees taking flexible income in the 2017/18 tax year were entirely in cash.

The FCA found this has a “significant cumulative impact on retirement income”. And it concludes that few are using cash as a short term safe haven and instead “remain in cash for a prolonged period”.

It estimates that an individual in cash could increase their annual income by more than a third if they invested in a mix of assets, including equities.

Investment risk

Consumers are rightly worried about loss in retirement. Unlike accumulation investors, they are less likely to be able to leave their savings untouched to recover market falls, or top-up their pot from earnings.