The freshly released interim report on Retirement Outcomes by the UK’s financial watchdog, the FCA, has flagged concerns that not enough consumers are securing a good deal when accessing their pension pots.
Regulation around access to pension savings was relaxed from 2015, allowing cash to be drawn down from the age of 55, previously 65, and providing for far more flexibility on the range of choices on how that is done.
Cash Accessed Early Used Sensibly
FCA data presented by the report suggests that as many as 72% of private and workplace pension holders between the age of 55 and 65 have taken advantage of the new rules to access cash early.
The good news is that the study finds that pension funds are largely not being frittered away by splurges on luxuries.
Concerns were raised in many quarters that freedom for pension holders to choose how and when to access pension funds would lead to poor financial decisions storing up financial problems for pensioners down the line.
However, the vast majority are accessing pension pots in a responsible manner and using them to buy income drawdown products that provide a long term, sustainable income.
30% Choose Products without Qualified Advice
The bad news is that the watchdog’s research suggests that over 30% of pension pot holders were choosing these products without taking qualified advice, down from 5% before the reforms. As a result, many consumers are choosing the first drawdown product put in front of them and failing to secure the best deals potentially available to them.
Patterns in the kind of products pension holders are buying have also changed dramatically in the past couple of years. Prior to 2015, 90% of pension holders bought annuities, an insurance product that in its most common form guarantees an inflation-linked regular income for life.
Now twice the number of drawdown products are being bought than annuities. An environment of record low annuity rates are almost certainly influencing this decision but the report also highlights that there are now only 7 providers offering annuities on the open market.
Report Highlights Mistrust of Pensions
The report also claims the primary motivation for under 65s to access pension cash early was a general mistrust of pensions, highlighting a further market concern that could be negatively influencing individual financial planning.
The primary concern the interim report raises is the simple flexi-access drawdown products that consumers can buy without taking financial advice.
94% of drawdown products were sold to customers who already had their pension pot with the same provider. This, the FCA believes, indicates a lack of competition, or awareness of competition, in the market with pension pot holders mainly opting for the first product offered to them and not shopping around other providers to secure a better deal.
A lack of innovation and variety in the products available to consumers is a further concern raised. Products that combine flexibility with an element of guaranteed income are particularly noted by their absence.
Solutions put forward by the FCA to tackle the flagged concerns were:
- Additional protections for consumers who buy drawdown without advice.
- Measures to promote competition for consumers who buy drawdown without taking advice such as allowing consumers to take some of their savings early without having to put the rest into a drawdown product.
Tools and services to help consumers make good choices, primarily by building on existing initiatives such as the free guidance provided by Pension Wise.
Have you accessed pension cash early? Do you trust pension providers? Let us know in the comments.