Pensions  

Survey: Clarity awaited on income drawdown

“I don’t envy the FCA in that it faces an almost impossible balancing act. On the one hand, the government is as committed as ever to the pensions freedom regime – and freedom for all irrespective of means and financial literacy. On the other, the FCA is tasked with protecting the less engaged from poor outcomes,” he says.

There are many points of the regulator’s proposed remedies that still require ironing out. Indeed, at 121 pages, the FCA’s consultation on its planned changes is longer than the 78-page final review itself.

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The watchdog flagged three particular aspects of its consultation as being of interest to the drawdown market. The first of these is the plan for three default investment pathways for non-advised consumers entering drawdown, based on whether a retiree wishes to take all their money over a short time period, dip into their cash occasionally, or wants it to provide an income in retirement.

Some have suggested this proposal is in conflict with the government’s recent observation that it is “not convinced” by the Work and Pensions Committee’s own suggestion of default pathways. There is a difference between the two, however. The FCA has said retirees should choose one of the three options themselves, whereas the government felt the committee’s interpretation would see individuals defaulted into a single product. In its words, this “would be inconsistent with the freedom and choice reforms”.

The FCA consultation acknowledged firms may wish to make these pathways available to advised customers. But it also acknowledged that self-invested personal pension (Sipp) providers are a slightly different group, and asked whether Sipp operators focusing on advised customers should be exempt from its plans, stating:

“Traditionally, the role of the Sipp operator is to facilitate self-investment by consumers, rather than offer ready-made investment solutions for them. Some operators may focus on advised consumers and sophisticated investors. We recognise that some Sipp operators may find it difficult to implement investment pathways, for example, if they lack the resources, expertise or permissions.”

Jessica List, pension technical manager at Suffolk Life, describes this potential flexibility as “good news for the industry and consumers”.

Charges

The regulator’s consultation has also asked questions of drawdown providers’ fees, saying charges “can be complex and unclear, so they are not easy to compare”, adding that it “also found wide price dispersion”. As a result, it has proposed changes to mandatory key features illustrations (KFIs) in an effort to ensure costs are appropriately highlighted to consumers.

Table 2 shows updated costs and charges for drawdown providers. As was the case last year, most fees have remained static despite the potential to derive economies of scale from growing books of business. In recent years, there were signs the industry had begun to shift towards annual charges, cutting back on certain one-off fees in the process. The latest figures suggest this process has, at the very least, been put on pause. Most providers continue to levy a variety of fees, but the FCA’s influence could yet prompt further change.