Despite the amount withdrawn from pension pots hitting its lowest level in Q4 2018 since the pension freedoms were introduced in April 2015, the regulator has expressed concern about the number of consumers moving into the drawdown phase and seeing their savings put into unsuitable investments.
The FCA has published a consultation on “investment pathways” created by pension scheme providers based on a customer’s stated objectives. These investment options would not require the consultation of a financial adviser and would act as the default solution.
Under the proposals, when a pension saver elects to enter the drawdown phase, he or she picks one of four statements about their intentions for the next five years and their funds are directed down this ‘investment pathway’, thus reducing the number who simply default into cash.
According to the regulator, it will be up to the pension company to provide investment solutions that “broadly” meet clients’ needs.
Default v advice
However, the FCA’s proposal was received with mixed feelings by experts. Jon Greer, head of retirement policy at Quilter, said that while the introduction of pension freedoms did not lead to a “disastrous over-spending” as some feared, there are still risks linked to people’s retirement.
“The risk around investment pathways is [that] it becomes the path of least resistance and people go for a default instead of engaging. When they come in, they will need to be positioned carefully to ensure we quash any misconception that it doesn’t require the customer’s ongoing input.
“The issue of non-advised drawdown remains one of the major concerns of pension freedoms. The proposed solution of investment pathways is under further consultation, which is only right given the complexity around creating such investment solutions.”
Similarly, Steven Cameron, pensions director at Aegon, argued that while the pension freedoms have proven very popular – with more than one million people taking advantage of them – going advice-less will not be enough.
“There are real risks that those not seeking advice will invest in a fund which is inappropriate for their retirement objectives. Asking customers entering drawdown to pick from one of four statements around their intentions for the next five years and then setting out a broadly suitable ‘investment pathway’ will be of help to some and will reduce the number defaulting into cash. But the pension freedoms by their very nature mean individuals have a highly personalised retirement journey.
“Crucially, we mustn’t give customers the false impression that improved communications or simplified investment pathways replace the benefits of advice. It’s only with professional advice that an individual’s personal circumstances will be fully explored to optimise retirement decisions. For many, it will hugely beneficial to seek advice on when to retire, where to invest, how much to withdraw taking into account life expectancy and steps to take to avoid paying extra income tax unnecessarily.”
Protecting consumers’ needs
The FCA’s proposals will also prevent a consumer’s pension savings defaulting into cash when they decide to access their tax-free allowance unless the client specifically agrees to the move.
In addition, the regulator plans to update its so-called “wake up packs” for people approaching retirement to ensure the full disclosure of charges and fees by pension providers.
“The pension freedoms give consumers more flexibility in how and when they can access their pension savings; but that also means they have to make more complicated choices,” said Christopher Woolard, executive director of strategy and competition at the FCA.
“Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement.”
The regulator estimates that the enactment of the proposal could benefit people by up to £25m a year. It will be accepting feedback on its plans until 5 April 2019.