The review notes that it is still 'early days and the market is still evolving as providers adapt to the pension freedoms', but noted that consumers have responded well to pension freedoms. Over 1.5m defined contribution pension pots were accessed between April 2015, when the freedoms came into effect, and September 2017 - with 72% of those by consumers under the age of 65. However, the move had also shifted how consumers chose to use their pension pots - there has been a 'substantial shift' away from annuities and towards taking drawdown without advice, with almost a third (32%) accessing drawdown without advice, compared to 5% before the freedoms were introduced.
The review set out measures which aim to protect consumers from poor outcomes, improve engagement with retirement income planning, and promote competition in the market. It also noted risks, including that too many consumers were investing in low-return cash investments or engaging with their pension plans too late when deciding what to do with their pension pot.
Some of the measures focus on increased communication to improve engagement, such as 'wake up' packs sent to consumers at age 50, with clear and accessible information to help consumers decide how to fund their retirement well in advance, or requiring consumers to receive ongoing contact with their drawdown providers throughout retirement. Other measures focused on giving more structured choices for consumers to help them decide what to do with their pension pot.
The regulator said that it was not proposing any direct action on the number of providers offering annuities, but would consult on measures to ensure consumers were given clear information about the market leading annuity rate compared to their provider's quote, and to encourage shopping around for enhanced annuities.
Commenting on the report, Steve Webb, Director of Policy at Royal London said:
“This is a welcome package of measures from the FCA. The report shows that consumers who do not take financial advice are at risk of losing out, with 94% not shopping around at retirement. The biggest risk is not consumers running down their pension pot too quickly – for which the FCA says ‘it has not seen much evidence’ – but savers locking their money into low-return cash investments for decades. Making sure savers do not sleepwalk into cash investments is an important step, as well as simplifying choices for savers at retirement.
“We also welcome the move to contact savers earlier before retirement about their options. Royal London recently starting sending ‘wake-up’ packs to savers five years ahead of retirement, and the FCA recommendations will build on this direction of travel.
“These recommendations are a proportionate and balanced package which preserve the spirit of pension freedoms whilst trying to make those freedoms work better, especially for customers who do not take financial advice’
Tom McPhail, head of policy, Hargreaves Lansdown, said:
“The pension freedoms are popular and working well but investors often need help and guidance in managing their retirement savings, these proposals will help address these needs.”
“Annuities can still be a very good deal for investors, particularly if their life expectancy is reduced for reasons of health or lifestyle. We welcome the fact the FCA is looking to give this option more prominence and to give investors a timely reminder that for some people at some stages of retirement, an annuity could be a better option than using drawdown.”
Rachel Vahey, product technical manager at Nucleus, responded:
“We support the FCA’s efforts to delve deeply to establish a clearer understanding of how people are using their new freedoms. The shock of the introduction of pensions freedoms has now worn off and we need to shape the market to achieve the best retirement outcomes for all the different types of consumers and their varying needs.
“One of the biggest concerns is sustainability and the risk people run out of money before they anticipate or wanted to do so. However, reckless conservatism is also a risk where people are removing money too early or too often, paying more tax than necessary and reinvesting in a bank account or an Isa.
“Drawdown – the product – is used in many different scenarios. By those who are taking their tax-free cash, providing a retirement income to last them their lifetime, or leaving a legacy. And by those who have a regulated adviser and those who are making decisions alone. It makes sense solutions developed by the FCA vary based on these different scenarios and the person, rather than being driven by the product alone.”
