“Consumers paying too much tax, missing out on investment growth or losing out on other benefits,” warns report

The Financial Conduct Authority (FCA) has published the interim findings of the Retirement Outcomes Review – the first major comprehensive study into how the retirement income market is changing since the introduction of pension freedoms in 2015.

The review found that:

• Accessing pension pots early has become “the new norm”. Almost three quarters (72%) of pots that have been accessed are by consumers under 65. Most are choosing to take lump sums rather than a regular income.
• Over half (53%) of pots accessed have been fully withdrawn. However the fully withdrawn pots are mostly small with 90% below £30,000, and 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension.
• Drawdown has become much more popular. Twice as many pots are moving into drawdown than annuities.

Although it is still early days for the market, the review identified five key areas of concern:

• Over half (52%) of fully withdrawn pots were not spent but were moved into other savings or investments. 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.
• Consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around.
• Consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5% of drawdown was bought without advice compared to 30% now. Drawdown is complex and these consumers may need more support and protection.
• Providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition over time.
• Product innovation has been limited to date, particularly for the mass market.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said: “Since the introduction of the pension freedoms, the retirement income market has changed substantially.

“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 view from RetireEasy

It’s important to remember that this was a review into the actions taken by individuals who did not seek professional advice – I’d like to think that those who DO take advice are not falling into some of the traps identified in this report.

But that does throw up some important points.

Firstly, too many people are NOT receiving professional advice before making decisions that could make a serious impact on their future wealth and the quality of the retirement.

There are a number of reasons why advice is not being sought but the key two ones (ignoring DB transfers) are the cost of advice and adviser rejection of ”small” cases.

The cost of advice for somebody wanting to access pension freedoms is high because:

1. Many pension plans cannot cope with flexible drawdown so the plan must be transferred first to allow flexi-access. There are strict FCA rules applying to transfers from DC to DC pension plans and most advisers will not take on this work without a full fact-find and a compliant lifetime cash flow analysis to show the client if and when the money will run out.
2. Inevitably there is cost attached to these services which normally starts out at £2,000 and for complex cases with a number of pension pots can lead to fees of up to £10,000.
3. These fees may well be worth the money for diligent investment advice that is reviewed regularly, tax effectiveness and ongoing Lifetime cash flow planning. However, the charges are too much of a drain on pension funds valued at £150,000 or less and even for larger funds many consumers do not see the value or do not trust the advice process.
4. So for many high value transfers – and almost all transfers below £100,000 – the consumer has to go it alone and the pensions advice service will not direct anyone to a specific provider… they are just there to highlight the warnings such as the tax on the encashed fund and the risk of spending the money and running out of money later in life.
5. Without advice, the risk of the correct product selection is 100% with the consumer and there are some very high charges about – and this is what the FCA has become increasingly concerned about.

Mark Soper ACII

There is a simple way to get a firm grip on all your choices: the Premium version of the RetireEasy LifePlan has a simple to use “scenario function”.

First, key in all your “known” parameters – your future income, assets and outgoings together with your desired income during each year of your retirement and save this as your “master template”.

You can then try out and save as many different scenarios as you wish – projecting, for instance, when and how much you might inherit in the future and seeing how this will impact your finances, and how much you could afford to pass down to younger members of the family.

Equally, if you are looking to pass on wealth in the future, you can see what effect gifting members of your family during your lifetime will have on your finances. This can also play a key role in managing future inheritance tax liabilities while ensuring you can live comfortably.

Knowledge is power – so make sure you know exactly what YOUR future might hold!