Pension Freedom  

FCA considers return to retirement income default options

FCA considers return to retirement income default options

Little more than two years after then chancellor George Osborne delivered pension freedom and choice, the Financial Conduct Authority is considering a return to default retirement income strategies.

In a 122-page paper published yesterday (12 July), the City watchdog stated consumers who access their pension pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around.

Before the pension freedoms, the FCA's Retirement Outcomes Review interim report stated, 5 per cent of drawdown was bought without advice. This is compared to 30 per cent now. 

As drawdown is complex the FCA stated these consumers may need more support and protection - over half (52 per cent) of fully withdrawn pots were not spent but were moved into other savings or investments. 

But Mary Starks, director of competition at the FCA, said while it wasn’t time to panic or act on this shift in the retirement income market, the watchdog did want feedback from the industry on whether there needs to be a new form of default option for savers struggling to make sure their pension pots last them a lifetime.

“It is an unbelievably complex decision for someone at retirement. They have a pot of money and say they are 65 they might be expected to live for the best part of another 30 years but frankly, who knows?

“They are not going to know what their needs are going to be over that time. They don’t know how active they are going to be. They don’t know what the stock markets are going to do. They don’t know what interest rates are going to do.

“For that reason we absolutely have to consider some form of default strategy being available to people. It is going to have to be an option that we take very seriously.

“I do think defaults are a very serious option to think about in the future but I do think there are questions around what is the right default option for different consumers and whether those defaults are best specified by legislators and regulators or industry.

“That is kind of the conversation we want to kick off with this report.”

Ms Starks conceded it is "really early days for the market", which has only had a couple of years to evolve since the reforms were introduced in April 2015.

She said the changes have had a big impact, but the regulator's view is there is no need to panic about people drawing all their cash from their retirement pots.

"For most people their defined contribution pot is not their primary source of income. At the moment most people have a defined benefit income or a property portfolio or are planning to live on the state pension. 

“It is way too soon to panic on taking cash. I think what we are seeing is quite a high proportion of people taking the cash out of their pension scheme and then saving or investing it elsewhere. We are not seeing the kind of Lambourghini crisis that was discussed at the announcement of the reforms.