Greater protection for savers using pension freedoms

Retirement.jpg

Watchdogs are weighing up new protections for over-55s using popular pension freedoms, as many now cash in retirement pots early or move savings to drawdown plans without advice.

New 'default' income drawdown plans and a cap to prevent people paying 'excessive charges' for them are being considered following a probe into the radical pension reforms launched in 2015.

This found tapping pension pots early has become ‘the new norm’, with 72 per cent of pots accessed by people aged under 65, and most choosing to take lump sums rather than a regular income.

Some 53 per cent of retirement pots are cashed in entirely, although these are mostly small with 90 per cent worth below £30,000.

Also, the vast majority of savers making full withdrawals have other sources of retirement income, according to the Financial Conduct Authority report.

But the watchdog joined money experts already raising the alarm about people switching retirement pots into current or savings accounts and letting them get gobbled up by low interest rates and inflation.

'Over half (52 per cent) of fully withdrawn pots were not spent but were moved into other savings or investments,' it says. 'Some of this is due to a lack of public trust in pensions. This can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits.'

The FCA also expresses concern about people who access pots early without taking advice, whom it warns typically follow the ‘path of least resistance’ and accept drawdown plans from current pension providers without shopping around.

It notes income drawdown has become much a more popular way of funding retirement since the pension freedom reforms, with twice as many pots being put into drawdown than used to buy annuities.

'Consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5 per cent of drawdown was bought without advice compared to 30 per cent now. Drawdown is complex and these consumers may need more support and protection,' says the FCA.

When it comes to annuities, the FCA says providers are continuing to withdraw from this market which means there is a risk of weakened competition over time.

Annuities provide a guaranteed income for life, but are widely considered poor value and restrictive. However, pension experts are worried that people who do need or want them are getting less choice and value as firms abandon the market.

The FCA has proposed the following measures to help deal with the fallout from pension freedoms.

  • Gather further evidence to assess whether extra protections are needed for those buying income drawdown plans without advice.
  • Probe whether income drawdown customers are paying high charges and have ended up with unsuitable investment strategies.
  • Explore whether drawdown providers could be required to offer 'default investment pathways' based on retirement outcomes chosen by customers.
  • Look at whether a charge cap should be imposed when people take the default route, to 'help ensure that those consumers who do not engage with their investment decisions do not pay excessive charges'.
  • Ask the Government to consider letting over-55s access their savings early without having to put the rest into a drawdown product.
  • Make it easier to compare and shop around for drawdown, and look at introducing tools and services to help people understand their options better and improve trust in pensions
  • The FCA has asked for feedback by mid-September, and aims to publish a final report in the first half of 2018.

What do pension experts say?

Ros Altmann, former Pensions Minister, welcomed the FCA study and its focus on the customer but expressed 'huge disappointment' that the pensions industry has failed to innovate radically following freedom reforms.

'Where are the new products or default options? And why are they called 'default options' anyway? The word 'default' is hardly attractive to non pensions people!' she said.

'Customers may be taking money out of the brilliant pensions products without realising the benefits they are giviing up - and possibly paying unnecessary tax too.

'New thinking might include, for example, a concept of"Lifetime Pension Accounts" which stay invested until you really need some income or capital.

'‎These could seamlessly run from a"growth phase" to an"income phase" when the customer wants to, without the huge extra charges involved in drawdown. Taking money out of pensions too early is detrimental to your financial well being.

'The Government's free guidance service could also help customers understand the benefits of staying invested for longer especially if still working.

'So perhaps we should make PensionWise free guidance mandatory or at least the default option. Ideally people need advice but at least PensionWise can steer them away from dangerous decisions.'

Andrew Tully, pensions technical director at Retirement Advantage, said: 'Two years on since the seismic changes to the pensions market were introduced, a worrying new norm is beginning to emerge.

'Far from valuing the income the pension was designed to generate, it would seem people have been taking full advantage of grabbing the cash early. This is back up by the government’s own stats on the additional tax take, which by their own admission is way higher than they expected.

'Many experts thought having to pay income tax on withdrawals would prove to be a natural brake but this clearly isn’t the case. Moving money from a tax-efficient pensions environment to place into other savings or investments is frankly bonkers.

‘For those people looking to generate an income, the market has swung towards drawdown, but the lack of shopping around pervades the market and is an issue whatever product you choose.

'While drawdown is not a one off purchase like an annuity, it is still important people look around for the right product, as you can easily find yourself caught out by high charges.'

Tim Gosling, of industry group the Pensions and Lifetime Savings Association, said: 'The FCA's interim retirement outcomes review makes for disturbing reading.

'Without timely action now, those retiring in the near future who are dependent on defined contribution pots and who have no access to advice will not receive the retirement they hope for.

'We need two things. First, we need a smoother customer journey at retirement that makes the line of least resistance an income product rather than cash. This may mean a form of"soft" default, intended to preserve consumer choice but designed to connect savers to the income 84% say they want1.

'Second, we need a new generation of high quality retirement income products. These need to have strong independent governance and be suitable for those needing an income but who do not have access to advice.'

The PLSA is developing a 'quality mark' scheme for income drawdown schemes, to help people divide good products from bad ones.

Tom Selby, senior analyst at AJ Bell, said: 'While the general public and the Government have clearly embraced the concept of freedom and choice in pensions, it seems the regulator is not as comfortable.'

'The FCA’s findings suggest the vast majority of savers are using the pension freedoms sensibly and the market is working well for consumers. It is therefore puzzling to see the regulator float a series of market interventions, including"default" funds for drawdown and charge caps.

'While it is right to place focus on savers shopping around the retirement income market, the review fails to acknowledge the fundamental difference between annuities and drawdown.

'Indeed, it even refers to people"buying" drawdown, when for most people entering drawdown is a relatively seamless continuation of pension saving.

'If someone fails to shop around for an annuity and buys with their existing provider, there is no going back. The same is not true for drawdown, where customers can switch easily at any time.'

Richard Parkin, head of pensions policy at Fidelity International, said he ws nervous about the FCA looking at levels of people switching away from their current provider's drawdown scheme to determine whether they are making good choices.

'This is a useful measure for annuities. However, where customers are going into drawdown with their existing provider, they will be doing so in existing workplace pension contracts that will be competitively priced and subject to strict governance.

'And they will also often just be accessing tax-free cash. We need to ensure people are getting a good deal but measuring this by switching activity alone will not achieve this.'Kate Smith, head of pensions at Aegon, said: 'Today’s report highlights just how significantly the pension freedoms have changed consumer

Kate Smith, head of pensions at Aegon, said: 'Today’s report highlights just how significantly the pension freedoms have changed consumer behaviour when it comes to retirement decisions and the knock on effects this is having on the industry.

'The FCA’s figures suggest we’re seeing the majority of small pots accessed well before traditional retirement age with around two fifths of people either paying down debts or spending the money, with half saving or investing it.

'The trend for people to withdraw money and save it is somewhat concerning given that many be moving towards low paying cash accounts and limiting their ability to benefit from further tax relief via a pension.'

'The findings suggest that this sort of approach is sustainable while people have defined benefit pensions and the state pension to fall back on as a means of providing a guaranteed income in later life. Looking longer term, the number of people who can expect a generous defined benefit income will decline over time.'

Huw Evans, director general of industry group the Association of British Insurers, said: 'At the time the pension flexibilities were launched we said it would be important to monitor how they bedded in and what the long-term implications are for pension savings.
'This report is a welcome part of that analysis, although our own data does not support the view that accessing pension savings early has become"the new norm".

'Providers responded swiftly to the pension reforms, which did introduce considerably more choice for savers. The market and services are still evolving and the sector is committed to helping customers make informed decisions.

'Work already underway by the ABI and its members includes a project progressing ideas on how a flexible income drawdown comparison tool would work, alongside efforts to increase consumer engagement with pensions and create a ground-breaking pensions dashboard service.'

Jon Greer, head of retirement policy at Old Mutual Wealth, said: 'Today's data from the financial regulator shows that consumers simply cannot afford not to take advice at the point of retirement. Therefore, the FCA is right to look at increasing consumer protections where people are either unable to unwilling to take advice.

'Over half of customers are taking their retirement savings and investing in something else, like an Isa, cash, buy-to-let or fixed-term deposit. This can have disastrous long-term consequences.

'Taking a lump sum in a single tax year is likely to result in paying more income tax than withdrawing money gradually. And savers are giving up future tax-free investment growth in a pension in exchange for comparatively low-growth assets like cash, or illiquid property.

'Figures from the Office of National Statistics last week revealed that almost half of people (49 per cent) consider property the best means of making money for retirement. Only 20 per cent of respondents said workplace pensions were the best way to maximise returns.

'Trust in pensions is a major issue and the regulator and the savings industry must do more to understand why some members of the public are fearful of pensions. There is a strong case for government to establish a cross-party independent commission to set pension policy.'

How do defined contribution and defined benefit pensions work? 

Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.

More generous gold-plated defined benefit - or final salary - pensions provide a guaranteed income after retirement until you die.

What is pension freedom?

Pension freedom reforms have given over-55s greater power over how they spend, save or invest their retirement pots.

Key changes from April 2015 included removing the need to buy an annuity to provide income until you die, giving access to invest-and-drawdown schemes previously restricted to wealthier savers, and the axing of a 55 per cent 'death tax' on pension pots left invested.

The changes apply to people with 'defined contribution' or 'money purchase' pension schemes, which take contributions from both employer and employee and invest them to provide a pot of money at retirement.

They don't apply to those with more generous gold-plated final salary or 'defined benefit' pensions which provide a guaranteed income after retirement.

However, those still saving into such schemes can transfer to DC schemes, provided they get financial advice if their pot is worth £30,000-plus.

Copyright © Associated Newspapers Ltd. All Rights Reserved.

 

This article was written by Tanya Jeffries from Daily Mail and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

flexibilitythatmightappeal.jpg