The FCA wants to ensure consumers can access their pension savings early without having to make a decision about drawdown before they are ready, but the idea has been met with a mixed response.
In the interim findings of its Retirement Outcomes Review, published today (12 July) the regulator noted some pension schemes do not have a drawdown feature, but instead require consumers to transfer out of their accumulation product and purchase a new product with a drawdown feature to access their savings
As a result, consumers have moved into drawdown with their accumulation provider just so they can access their tax-free cash before retirement. Typically they are not shopping around or checking whether the product is suitable or good value because they are not focused on making a decision about the rest of their savings pot.
In its report, the FCA stated: “We consider the decision to access tax-free cash early should be ‘decoupled’ from the decision about what to do with the remainder of the pot.
“This will ensure consumers only have to make a choice about their retirement income product at a time when they are ready to do so, for example, when they are considering fully or partially retiring.
“Ahead of the final report, we will work with the relevant stakeholders to explore what changes would have to be made to break this link and the potential costs and benefits of doing so.”
Mark Norman, IFA at Matthew Douglas, said the FCA’s ‘decoupling’ idea could mean fewer clients get financial advice at a crucial time.
“It’s always an advice point at that time to discuss all the options, and if that need to speak to an adviser at a critical time is taken away, that would be disappointing."
He said clients stuck in an inflexible old scheme could benefit from lower costs if the idea was implemented, but may miss out on valuable advice.
Currently clients that aren’t on platforms but are in old style policies are in the worst postion, he said.
"You get a bit hand tied when you want to look at the options. We have to compare costs of staying in an existing scheme versus coming out, and sometimes we can’t compare costs because they have got to move as well at that point."
Hayley North, co-founder of London-based financial planner Rose & North, welcomed a severing of link between tax-free cash and drawdown, but also flagged concerns about people missing out on advice.
“The FCA is light years behind where there is such a thing as a drawdown product. We all use platforms now. I don’t know which advisers the FCA works with but they are not anything like the people I know.
“The vast majority of people in retirement have to transfer if they want to access their tax free cash, it is a very real problem.
“Legacy providers such as insurance companies have old products that will not facilitate any of the new pension freedoms. As a result, clients, if they want their tax-free cash, have to make an immediate decision whether to take an annuity or go in to some form of drawdown.
“On one hand, that’s very positive as long as they are still getting advice. My concern would be if you decouple it and they aren’t taking advice, you’ve got lots of people then in terrible pension plans with even less money than they had to start with.
“It is great if they don’t have to make that decision, in some rare cases they might be in a perfectly decent pension plan, particularly those who are guaranteed annuity rates when they want to take a lump sum but don’t want to take the annuity yet.”
North added she would be surprised if the FCA can make people ‘move with the times’, especially as technology is a real issue for many older clients in the sector. She adds suitability should remain the key focus for IFAs.
“I understand where they are coming from, the FCA is worried about the number of people being advised to go in to drawdown, that is a genuine concern, but advisers should not be putting people into drawdown if it’s not suitable for them, and that’s not something that’s new.
“It’s another red herring, if you want to do this as an adviser, you can already do this. You can easily move a client, get them to take their tax free cash, move them into a low risk drawdown portfolio but not take any income and then convert them to an annuity when they are ready, which is effectively what the FCA is suggesting should happen here.”
