- Pension Freedoms not yet working properly as millions have no independent guidance or advice.
- FCA study highlights need to redesign drawdown for new customer profiles.
- Regulator demands better investment options, cost transparency and threatens to cap charges.
- Wake-up packs at age 50 and standard ‘pensions passport’ are major improvements.
New regime not working well for customers as providers fail to innovate: The FCA’s latest report on how pension freedoms have impacted the retirement income space shows that there is much work still to do to ensure the new regime works well for pension savers. Those customers without financial advisers are not being well-served by the existing market and providers have failed to innovate sufficiently to serve their customers’ needs.
Savers need more guidance, advice and better value drawdown products as they face more risks: As the traditional Defined Benefit schemes are nearly all closed, millions of people have Defined Contribution pensions. With more and more people relying solely on such pensions – which place all the risk onto the individual – it is vital that customers have access to good value, suitable products, independent guidance and advice to help them make the most of their pensions.
Old system had to change but individuals need help to cope with the risks: The Government was absolutely right to scrap the previous mandatory annuitisation regime. Most people were effectively forced to buy an annuity, usually well before age 65, without guidance or advice. This resulted in them frequently being locked into the wrong annuity at a poor rate.
New system still plagued by many of the same problems as previous regime: Unfortunately, the evidence uncovered by the FCAs Retirement Outcomes review suggests the new system is plagued with similar problems. It is a real pity lessons seem not to have been learned. Instead of buying poor-value annuities, without shopping around, unadvised customers are just buying their existing pension provider’s, often-expensive, drawdown product, without shopping around. An astonishing 94% simply roll into the drawdown product offered by their pension provider. At least, with the new flexibilities, they will have a chance to improve their choices in future.
Finally, FCA will require annuity providers to ask about health so people get a suitable annuity for their circumstances: For those still buying annuities, it is also important that providers must ask about their health, and provide indicative quotes, so they get the right type of annuity and find good rates.
FCA is right to demand better costs transparency and threaten charge cap: The FCA finds the most expensive drawdown products charge four times as much as the cheapest (1.6% vs, 0.4%) with other fund charges added on top. I am delighted that it proposes to force providers to disclose pounds and pence costs, so customers can compare drawdown charges and, if this does not work, threatens to impose a charge cap.
Too many drawdown customers just hold cash – so they will lose out over time: One third of non-advised drawdown customers hold their funds just in cash. Given that pensions should have a 20 year or longer time horizon this is not optimal and is likely to mean they lose out on significant amounts over their retirement.
Innovation urgently required to suit different customer profiles: Providers have not modernised their drawdown products to account for the new pensions landscape and a very different customer profile. People using drawdown now tend to have smaller funds than before and are likely to be less financially savvy and less well-off than in the past. Designing good value, sensible investment options for them, would help improve their retirement outcomes.
Pensions Passport and regular statements will also help improve communications: At the moment, pension companies send out reams of baffling information which most people do not read or do not understand, six months before pension age. The FCA’s proposal to introduce a standard one-sheet form that will summarise customers’ pension savings, without complex jargon, can help people engage with and understand their pensions at last. Having trialled this approach and found it successful, I hope that there will be a speedy introduction of these one-page forms that will show people what they have.
Wake-up packs at age 50 offer best behavioural nudge and can improve engagement: I fully support the idea of sending wake-up packs to pension savers from age 50, rather than waiting till just 6 months before their chosen pension age. The behavioural messages with an age 50 wake-up pack would be the opposite of those under the current system. Currently, the message from the ‘wake-up’ – often sent to people in their late 50s or early 60s who are still working – is that their pension is almost over and they must now decide how and when to take money out. That is totally the wrong message. Instead, age-50 wake-up packs would show what they have built up so far, and, as they can’t withdraw anything for many years yet, the pack can focus on whether this is enough. Might they want to put in more? Rather than suggesting they have ‘finished’ their pension, they can plan to build up more. After all, age 50 is just the start of the second half of adult life and pensions are often the most tax-advantaged way to save for later life.
I welcome trial of default guidance to help people plan their pensions better: Pension freedoms have the potential to revolutionise pension outcomes and make pension saving more user-friendly. But people need help before they make any decisions. The Government’s free independent guidance service – PensionWise – can help people plan their finances and understand investment choices. Many would benefit from using a professional independent financial adviser too. But to make the system work properly, providers must design good value innovative investment approaches and ensure customers can make informed comparisons and choices. The FCA is on the case, it must keep pressuring for more change.