The rising number of consumers who buy drawdown without advice has given prominence to the need for greater support and protection, says the Financial Conduct Authority.
The FCA’s Retirement Outcomes Review interim report, published on Wednesday, states that the proportion of drawdown bought without advice has now risen to 30 per cent, up from 5 per cent before freedom and choice was introduced.
People are not blowing their savings on consumer goods, but it’s curious that they’re taking it out of one form of saving and putting it elsewhere
Mary Starks, FCA
“There is a question about whether further support and protection is needed to manage drawdown effectively,” stated the report.
It highlighted that most people accept the drawdown option offered by their pension provider without shopping around, and plans to investigate further to see if there is a lack of competitive pressure to offer good deals.
Enable consumers to make comparisons
Mary Starks, chief economist and director of competition at the FCA, said: “We are seeing very significant shifts in consumer behaviour as a result of the reforms, which suggests that consumers welcome the freedoms.”
The report shows that 53 per cent of pots accessed have been fully withdrawn, and 52 per cent of the fully withdrawn pots were not spent but transferred into other savings or investments.
Starks said that, on the whole, “people are not blowing their savings on consumer goods, but it’s curious that they’re taking it out of one form of saving and putting it elsewhere”. She noted that one of the main reasons was a mistrust in pensions.
FCA Retirement Outcomes Review Interim Report
Key findings
Since pensions freedoms were introduced, over half of pots accessed have been fully withdrawn, and over half of the fully withdrawn pots were transferred into other savings or investments, partly due to a mistrust of pensions
Most people accept the drawdown option offered by their pension provider without shopping around
Annuity providers are leaving the open annuity market, reducing choice for consumers in the open market
Product innovation has been limited, but may pick up as DC pots grow in size and the market matures
Key proposals
Once someone decides to purchase a drawdown product, or they are moved into drawdown to access their tax-free cash, providers could be required to offer them default pathways based on retirement outcomes chosen by the consumer
The role of IGCs could be extended to also scrutinise decumulation products to ensure that they are appropriate and offer value for money
There could be additional protections for consumers who buy drawdown without advice
Measures to promote competition for consumers who buy drawdown without taking advice could be introduced. This includes proposals to allow consumers to take some of their savings early without having to put the rest into a drawdown product, and tools and services to help consumers make good choices, primarily by building on existing initiatives
In the report, the watchdog said that it is considering intervention by facilitating the introduction of drawdown comparison tools and promoting the use of summary cost metrics.
Starks noted that it is difficult to compare drawdown products, and “there’s a lot of room for improvement on that”, but “it is early days in the market”.
People deciding what to do with their life savings should be able to make comparisons and exercise effective choice, “and that’s where we want to get to”, she said.
The report also points out that although a few firms have developed new products, such as hybrids that combine flexibility with guarantees, innovation has been limited. However, the regulator is not proposing any immediate action.
“The market’s not yet mature enough, the pot sizes are still small,” said Starks. “We expect to see innovation coming further down the track.”
Where is innovation needed?
On innovation, Fiona Tait, technical director at Intelligent Pensions, noted that the take-up of the hybrid products that the FCA mentioned is very low.
Tait suggested that this is because hybrid products tend to be more expensive and complicated. “I’m not sure that that is something that is required, and specifically not by the mass market,” she said.
“Perhaps it would be helpful if there were more partial annuitisation and partial withdrawals available, so that people could combine different options, but I’m not at all convinced that we need different wrappers,” she added.
With so many people using drawdown, “what we need is to help people use that drawdown facility in the best possible way”, said Tait, but agreed that there is a need for developing tools and support mechanisms.
Shrinking annuity market raises questions over competition
The issue of annuity providers leaving the open annuity market was also flagged by the FCA.
Annuity purchasers regret decision as confusion 'remains rife'
Despite widespread confusion, most defined contribution savers are happy with the retirement choices they have made in light of the introduction of freedom and choice, with the exception of those who have purchased an annuity, a survey has found.
Stephen Lowe, director at Just Group, said that while progress has been made, the FCA’s latest report “clearly shows that consumers still aren’t getting access to the open market in the way that the regulator wants them to”.
Lowe noted that the general theme coming through in the report is that consumers need help and are not well equipped to cope with the introduction of pension freedoms. He added that the term 'freedoms' is ill-defined and should be described as 'flexibilities' instead.
“There are often rash, quick decisions being taken to access pension money,” Lowe said. He said that pensions are sometimes treated “like some fast food joint”, referring to consumers' ideas of “free money” and questions around how quickly tax-free cash could be accessed, as highlighted in the consumer research included in the FCA’s report.
Pensions have an image problem
Jon Greer, head of retirement policy at Old Mutual Wealth, said that taking retirement savings and investing the money in a single asset class, in property and cash ISAs, for example, can be risky. However, many people are doing this because “pensions still suffers from an image problem”.
“Although [consumers] like pension freedoms, they like pension freedoms because they can maybe access their money and put it somewhere else where they feel more comfortable. But that other place might not be the best place for them,” he said.
