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 data reveals that non-advised drawdown sales have ballooned from 5 per cent before pension freedoms to 31 per cent now.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.
Key points
- 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.
2. Annual statements for drawdown customers that must include a prompt to review whether their income needs have changed. I’m so glad the FCA has woken up to the fact that income drawdown is not a ‘once and done’ decision. This can only be good news for advisers, as drawdown policyholders are repeatedly reminded of the need to take stock and replan.
3. Charges disclosure in a straightforward annual pounds and pence figure, to be included in a revamped key features illustration. Everybody can understand money, as opposed the percentages and basis points, or bp, that our industry often reverts to. If the adviser, platform and fund manager are all delivering a good service, then we should have nothing to fear by being open and transparent about what the customer is paying.
Reconsidering annuities
I see the regulator’s ROR review as being good for the annuity market too.
I think we are all familiar with the research that shows that, when asked what they want from their retirement, customers describe a stable and secure income that won’t expire before they do. But when asked if they want to buy an annuity, they promptly reply, “no way”.
Often, this is driven by a reluctance to tie their money up irrevocably too early in retirement. So, the concept of pushing customers to an annual reappraisal of their needs will repeatedly bring the consideration of annuity purchase, for those that originally chose drawdown, to the forefront of their minds.
I also see the greater transparency around charges disclosure as another driver for annuity sales.
Let me explain: because the costs of an annuity are all contained within the rate, when a client moves from 100 per cent drawdown to 75 per cent drawdown and 25 per cent annuity, they will see a 25 per cent reduction in the pounds-and-pence cost disclosure on their new annual statement.
The idea of repeatedly buying further slices of annuity could be a particularly good way of dealing with clients where investment gains are exceeding income withdrawals, as that will stop the disclosed drawdown charges from increasing each year as funds under management swell.
But my praise for the FCA is not unconstrained. Three of its suggestions stick in my gullet:
1. They should have killed off the idea of a price cap while they had the chance. They suggest 75bp as a yardstick for the combined costs of investment management, platform services and adviser fees. To see how ridiculous this is, just observe that the investment management alone could be as low as 3bp for a customer for whom a UK index tracker is appropriate, yet could exceed the whole 75bp for a customer for whom active management, overseas shares, small companies or property are more suitable.
2. The FCA still seems to be in the mindset that the game is income drawdown or annuity, when I think it should be income drawdown and annuity. Many customers would be well-served by having a secure regular income to meet essential costs, backed up by an investment and drawdown strategy to meet luxuries, occasional capital items and inheritance gifts. It’s high time that the FCA woke up to this and started to shift the market to people having a bit of both.
3. I think HM Treasury will be rubbing its hands in glee about the proposal to decouple tax-free cash and sending out earlier wake-up packs (every five years from age 50) so customers know the cash is coming. In their minds, they will have spent it before they get to age 55, and even more people will be taking their full tax-free cash at the earliest opportunity.
Overall, we have lots of work to do. Some of it is set out in the accompanying CP18/17, which is open for responses until 9 August. But if the FCA manages to implement many of the recommended changes carefully and proportionately, then it can make the decumulation market a better place for the modern DC-dominated customer.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
