The Financial Conduct Authority (FCA) today consulted on rule changes to stop up to 100,000 consumers a year losing out on pension income when they access their pension freedoms.
Here are the five key things advisers must know about the FCA's latest set of rules regarding pension freedoms.
1) Take advice
Providers of pensions must recommend savers consult an adviser before making changes to their investment approach or drawdown options.
Instead of firms having the option to suggest clients gets professional advice or guidance, the regulator now expects them to do so as a matter of course.
"Firms will now be required to invite clients to consider reviewing their pension product choices and their investment choices and consider the option of taking regulated advice or seeking independent guidance," the review stated.
2) New pathways available
“Investment pathways are to be prepared by firms offering pensions to savers who do not opt for advice, that broadly chime with their objectives.
The Single Financial Guidance Body will create a comparator tool for the pathways if firms are too small to offer these options themselves and the FCA will keep an eye on charges leaving the door open to imposing a cap in future.
Hargreaves Lansdown’s head of policy Tom McPhail said: "The retirement pathways will be immensely helpful to those investors who currently lack the experience and confidence to tailor their retirement investment strategy to meet their changing circumstances.
"The pathways also place a significant duty of care and responsibility on providers to present suitable solutions to their customers."
3) Changes to wake-up packs
Wake-up packs will be issued to savers around their 50th birthday.
The regulator agreed that this would not put undue time constraints or costs on providers and would get savers more engaged with their retirement planning.
These packs will have a generic risk warning.
As savers will receive their packs earlier, the regulator ruled there is more reason for these documents to outline the risks faced when accessing their pension pots.
The regulator has agreed to issue guidance on what these warnings should be and how providers calculate assumptions.
It has put a limit on the explanations taking up no more than one side of A4 and has not ruled out the creation of an industry-wide template.
Despite some pushback from the industry, the regulator has banned what it calls “marketing material”, a term it says it has clarified, from all wake-up packs sent to savers.
Financial promotions, including marketing materials and application forms, are considered to distract consumers from the key information and adds to the volume of materials they receive, undermining the FCA’s policy intention.
4) Annuity questions and quotes
Firms will be required to ask consumers who express an interest in buying an annuity, questions to decide whether they are eligible to buy an enhanced annuity.
Providers will then be required to generate a market‑leading annuity quote.
However, following the consultation, the FCA has decided it will not be giving firms a set of questions to ask consumers, but suggested several major health and lifestyle areas that firms may consider asking about.
Firms can ask more detailed questions if they wish.
As the market‑leading comparison provided is not a guaranteed quote, the FCA will remove the wording in the information prompt text that states that the comparison quote is guaranteed.
5) Key facts
All key facts for clients considering drawdown are to be illustrated on one front page of a larger, detailed document.
The FCA wants firms to show charges in cash (pounds and pence) amounts and illustrate what the money in the pot today might buy in the future.
Firms will also be required to illustrate, though case studies, the impact on their pot of regular withdrawals and leaving the money where it is.
Elizabeth Pfeuti is a freelance journalist
