I found myself in a good place after reading all 78 pages of the final report of the Financial Conduct Authority’s Retirement Outcomes Review (ROR).
I felt that sort of bond and comradeship you feel when you realise that you are not alone in trying to sort one of the world’s ills, and that others are fighting alongside you.
As the ROR points out, the majority of people accessing their pension pots (54 per cent) post pension freedoms, cash them in completely.
The second most popular choice is purchasing an income drawdown policy, which offers no guarantees of stability of sustainable annual withdrawals.
It also offers no certainty as to whether it will be exhausted well before the customer passes away.
I suppose my concerns stem from hurt pride that, after a lifetime of trying to help people with their pensions, it seems that most just want to cash it in and put it in their local bank or building society – assuming they still have a local branch that is.
The FCA’s concern is differently motivated – as always, it is lying awake at night worrying about the danger of consumer detriment.
Evident detriment is actually quantified by the ROR: it says consumers could secure an income that is 37 per cent higher if they chose to invest their pensions pot in a healthy mix of assets rather than holding it all in cash.
In other words, they are losing around one-third of their pension from poor choices at the very point of decumulation.
But what’s different here is that the FCA has realised that this isn’t down to some dastardly behaviour by advisers or pension providers.
No – it is the consumers who are self-harming.
- The FCA has found consumer detriment is often the result of poor choices
- The ROR is good for the annuity market
- The price cap idea should have been ditched by the regulator
Cash is king
The FCA data reveals that non-advised drawdown sales have ballooned from 5 per cent before pension freedoms to 31 per cent now.
And that, in most cases – between 56 per cent and 76 per cent, depending on pot size – the reason for setting up drawdown has nothing whatsoever to do with pensions. It’s because of an urgent desire to get their hands on the tax-free cash.
Despite the criticism from Frank Field, chairman of the influential Work and Pensions Committee, that the FCA is moving at a glacial pace, I see some good ideas here that they will implement steadily, hopefully taking care not to create another series of unforeseen consequences as former chancellor George Osborne did with his ‘rabbit out of the hat’, no-consultation pension freedoms announcement.
I specifically like three:
1. Three simple investment pathways all focusing on consumer needs: one for those wanting a long-term income; a second for those looking to spend the pot quickly; and a final one for those looking for a long-term investment that they may dip into occasionally. Particularly for the non-advised customer, it is so much better to ask them about their income needs in semi or full retirement, which they should be able to express, rather than asking them to choose an investment fund, which they are desperately ill-equipped to do.