More than two years after then chancellor George Osborne's pension freedoms were introduced, the Financial Conduct Authority has revealed the myriad of problems it has created and come up with what it plans to do to stop people ending up impoverished in retirement.
In a 122 page paper published today (12 July), the FCA revealed it had "identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future."
The regulator's review uncovered five key areas of concern:
- Consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around.
- Consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5 per cent of drawdown was bought without advice compared to 30 per cent now.
- Drawdown is complex and these consumers may need more support and protection.
- Consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around.
- Consumers are increasingly accessing drawdown without taking advice.
Before the freedoms, 5 per cent of drawdown was bought without advice compared to 30 per cent now.
Drawdown is complex and the FCA states these consumers may need more support and protection.
· Providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition over time.
· Product innovation has been limited to date, particularly for the mass market.
· Over half (52 per cent) of fully withdrawn pots were not spent but were moved into other savings or investments.
Some of this is due to a lack of public trust in pensions, according to the FCA.
The regulator is concerned this can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits.
In a bid to address these issues, the FCA has outlined a plan of action.
The regulator intends to collect more evidence on consumer outcomes to assess whether additional protections should be put in place for consumers who buy drawdown without advice.
The watchdog will gather evidence on whether consumers pay high charges and have ended up with unsuitable investment strategies by failing to take advice before entering drawdown.
Improving competition in non-advised drawdown by further evidence on consumer outcomes to assess whether additional protections should be put in place for consumers who buy drawdown without advice. We will gather evidence on whether consumers pay high charges and have ended up with unsuitable investment strategies.
The watchdog work intends to improve competition in non-advised drawdown by asking the government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot.
Plans to make it easier to compare and shop around for drawdown are also to be formulated.
Tools and services to help consumers understand their options after the pension freedoms and improve trust in pensions are also proposed by the FCA.
According to the watchdog trust in pensions will primarily be restored by building on existing initiatives such as the free guidance provided by Pension Wise.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Since the introduction of the pension freedoms, the retirement income market has changed substantially.
"This study looks at what has happened during this time, and gives us an early view of areas to keep a close eye on.
“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future.
"Ensuring this market works well will require cooperation across government, regulators, the industry and consumer bodies.
“We will work closely with stakeholders to make sure we are clear on the actions we are best placed to lead.”
The FCA is inviting feedback on the initial findings and recommendations, and aims to publish a final report in the first half of 2018.
emma.hughes@ft.com
