Pension Freedom  

Five key points about FCA’s pension freedoms shake-up

Five key points about FCA’s pension freedoms shake-up

The Financial Conduct Authority revealed a worrying trend towards entering drawdown without advice and who is likely to seek your help to figure out the best course of action post pension freedoms.

For those of you who can’t face ploughing through the FCA’s 122-page Retirement Outcomes Review: Interim report published today (12 July), here are the five things you must know about what it contains.

1) How people are using pension freedoms

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The FCA found consumers have welcomed the pension freedoms with more than one million defined contribution (DC) pension pots accessed since the reforms. 

In most cases DC pots accessed were small (64 per cent were less than £30,000) compared with the value of the state pension (worth about £200,000). 

The pension freedoms were found to have changed the way consumers access their pots.

Accessing pots early has become ‘the new norm’ with 72 per cent of pots since pension freedoms accessed by consumers aged less than 65, most of whom have taken lump sums. 

More than half (53 per cent) of pots accessed have been fully withdrawn.

Nine out of 10 of these were smaller than £30,000 (60 per cent were less than £10,000) and 94 per cent of consumers making full withdrawals had other sources of retirement income in addition to the state pension.

The regulator said it does not therefore see this as evidence of people "squandering" their pension savings, though the watchdog does have concerns about why people are shifting savings out of pensions. 

Drawdown has become much more popular: twice as many pots are moving into drawdown than annuities.

Before the pension freedoms, more than 90 per cent of pots were used to buy annuities.

Providers were found to have developed tools to help consumers understand the changes and introduced simpler flexi-access drawdown products that consumers can buy without taking financial advice. 

2) Emerging problems with pension freedoms 

The FCA concluded the market is still developing and firms and consumers are continuing to adjust to the reforms. 

But five emerging issues were identified. More than half (52 per cent) of the fully withdrawn pots were not spent but were transferred into other savings or investments. According to the FCA some of this is due to mistrust of pensions. 

The regulator also revealed concerns that most consumers choose the "path of least resistance" and accept the drawdown option offered by their pension provider without shopping around. 

Many consumers were also found to buy drawdown without advice but the regulator concluded they may need further protection to manage their drawdown effectively. 

The proportion of drawdown bought without advice has risen from 5 per cent before the freedoms to 30 per cent now. 

The FCA also noted annuity providers are leaving the open annuity market, reducing choice for consumers shopping around in the open market. 

In July 2017 only seven providers still offered annuities on the open market, which the FCA acknowledged may weaken the effectiveness of competition over time. 

While there was much fanfare that providers would come up with new retirement income solutions when pension freedoms were first announced the FCA found product innovation has been limited to date.