The Financial Conduct Authority (FCA), which is the regulator for the financial services industry, has issued a warning to pension savers about the dangers of making major financial decisions without consulting a financial adviser.
In its Interim Retirement Outcomes Review just published, the FCA was referring specifically to the new pension freedoms introduced in April 2015. These allow savers to withdraw lump sums from their pension.
The report said that just over half (53 per cent) of pension savings accessed since the new rules took effect were fully withdrawn, however 90 per cent of those were below the value of £30,000. Furthermore, 52 per cent of fully withdrawn pensions were moved into other investments or savings, rather than being spent.
What worries the FCA is this: an increasing tendency among consumers to make decisions and take action without the guidance of a qualified financial adviser.
The report finds that, before the rules took effect in April 2015, just 5 per cent of decisions regarding pensions drawdown were made without advice, but since then the figure has risen to 30 per cent. That means that nearly a third of crucial financial decisions are being made without proper guidance, which can, according to the FCA, lead to “consumers paying too much tax, missing out on investment growth, or losing out on other benefits.”
Consumers acting without advice are also more likely to accept drawdown from their current pensions provider when, by ‘shopping around’ a much better deal could have been available.
Consequently, the FCA has said it now wants to make it easier for customers to compare and shop around for drawdown services, and also to provide consumers with information that will allow them to better understand their options.
Commenting on the report, an FCA spokesman pointed out that the market for drawdown services is still at an early stage of development, and that as the regulator it will be seeking ways to encourage the industry to provide a wider range of products.
He said: “We have identified areas where early intervention may be needed, either now or further down the track, to put the market on the best footing for the future. Ensuring this market works well will require cooperation across government, regulators, the industry and consumer bodies.”
The report also notes that accessing our pensions early, i.e. before the age of 65, has become “the new norm.”
In fact, nearly three quarters (72 per cent) of pensions were accessed by people under 65, with most of them preferring to take a lump sum rather than use their savings to provide a regular income.
Customers have the option to purchase a pensions annuity, a family of financial products that will turn your savings into a regular income for life. However, as was expected, the rules have made drawdown a more popular option, with twice as many savers preferring the drawdown route rather than annuities.
The FCA’s warning to customers is that more support and protection is needed when negotiating a process as complex as pensions drawdown.
As was mentioned, this is just an interim report. The FCA will continue to gather evidence on consumer behaviour, paying special attention to the outcomes of non-advised drawdown and continuing to alert consumers to the wisdom and good sense in consulting an adviser.
The FCA’s final report will be published in 2018.
Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 7188 6005. For further information go to ‘Kennedy Independent Financial Advice Ltd’ on Facebook