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.
The watchdog has said it plans to amend its rules to ensure KFIs include important information on its front page, including a pounds-and-pence figure for real charges in the first year. Notably, this must also be provided to customers using existing contracts to move into drawdown or take an income (including uncrystallised funds pension lump sums) for the first time.
On the possibility of simplifying illustrations in general, Xafinity says: “It is a tough task, but the vast majority of consumers find it difficult to understand all the assumptions on inflation, mid and low growth rates, the impact of product fees, and IFA remuneration and how regular withdrawals affect the overall pension pot.”
Hamid Nawaz-Khan, chief executive of Alltrust, says drawdown “has become more complex with time” and that illustrations remain just a starting point. He highlights the usefulness of modelling actual scenarios for clients. “A lot of advisers are doing this… it gives a client far better understanding as to the nature of the drawdown that suits them.”
The review’s two major findings on cash could have important implications for the industry. The first centres on a proposal raised by the interim report: the possibility of “decoupling” the tax-free lump sum from the need to move into drawdown.
The FCA suggested this because it found many consumers move into drawdown solely so they can take this lump sum. The final report has retained the recommendation for the government to consider this option, but with much less emphasis than in the interim review.
While some providers had been in favour of the move, others had said the complexity involved would make implementation onerous. This can be a common complaint by providers faced with regulatory change, but the final report did make an apparent nod to this argument.