DrawdownJun 28 2018

FCA finds third of non-advised drawdown pots stuck in cash

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FCA finds third of non-advised drawdown pots stuck in cash

Around 50,000 (33 per cent) non-advised consumers are wholly holding cash, with more than half at risk of losing out on significant returns as a result, according to estimates from the Financial Conduct Authority (FCA).

Someone who wants to draw from their pot over a 20-year period could increase their expected annual income by 37 per cent by investing in a mix of assets rather than just cash, the watchdog stated.

The findings are part of the regulator's Retirement Outcome Review final report published today (28 June) – after releasing its interim conclusions last year - alongside a package of measures to improve the way people fund their retirement.

Its far-reaching research also found the vast majority (94 per cent) of consumers who accessed their pots without taking advice accepted the drawdown option offered by their pension provider, compared to only 35 per cent of advised consumers.

The regulator concluded some providers were ‘defaulting’ consumers into cash or cash-like assets, which is not appropriate in the long term.

The FCA said: “Holding funds in cash may be suited to consumers planning to drawdown their entire pot over a short period.

“But it is highly unlikely to be suited for someone planning to draw down their pot over a longer period.”

The FCA research found around one in three consumers who have gone into drawdown recently are unaware of where their money was invested, while other only had a “broad idea”.

The regulator is also concerned about “the high proportion of consumers fully withdrawing their pension pots to move savings elsewhere”.

In many cases, keeping money in a pension would have resulted in better returns, on average, and in paying less tax, it said.

The FCA concluded that this behaviour was partly driven by a lack of trust in pensions, stemming from a range of factors including past pension scandals - where consumers tend not to distinguish between defined benefit and defined contribution - and frequent changes to pension rules and tax treatment.

Given the fact non-advised consumers are less likely to shop around, the watchdog noted there is a lack of competitive pressure, which means consumers might pay too much in charges.

The FCA found that these fees vary from 0.4 to 1.6 per cent between providers, and are, on average, higher than in accumulation (where in some cases they are capped at 0.75 per cent).

“Drawdown charges can be complex, opaque and hard to compare. Products can have as many as 44 charges linked to them,” the watchdog stressed.

By switching from a higher cost to a lower cost provider, consumers could increase their annual income by 13 per cent, it added.

According to Andrew Tully, pensions technical director at Retirement Advantage, “the dust is only just beginning to settle” after the introduction of pension freedoms in 2015.

He said: “In the main things are working well, but there are certain behaviours emerging which should be cause for alarm, rather than celebration.

“People have fully embraced the ability to withdraw cash from the age of 55, often before planned retirement, and often ignoring the tax implications for doing so.

“A high proportion of consumers fully withdrawing their pension pots are simply moving their money into another savings product, a decision which is likely to mean they pay more tax than they need to.”

Sir Steve Webb, director of policy at Royal London and former pensions minister, argued the report showed “that consumers who do not take financial advice are at risk of losing out”.

He said: “The biggest risk is not consumers running down their pension pot too quickly – for which the FCA says ‘it has not seen much evidence’ – but savers locking their money into low-return cash investments for decades.”

Ian Browne, pensions expert at Old Mutual Wealth, said: “We should not settle for the bare minimum for non-advised customers.

“Every customer deserves the chance for prosperity in retirement and the FCA’s findings are clear in showing there is huge value in advice.”

David Hearne, director at Satis Asset Management, said he is concerned that many customers "may not realise they are only invested in cash, and that without advice their drawdown fund may reduce in value due to charges, may lose purchasing power due to inflation and lose the opportunity to grow that investing in other assets would provide".

He added: "I’m also cautious to draw too many conclusions from the data. Leaving the pension in cash could show that they have listened to the warnings about tax on drawdown and waiting for the next tax year to take and spend this income. If so, holding cash may be the best asset. 

"Also, many may have other, larger pensions that are invested. The new rules have created new ways to tidy and up simplify your financial affairs. Where as advisers we might consolidate a number of small plans, unadvised clients may take a different approach such as a sequence of one pension at a time."

maria.espadinha@ft.com