The Financial Conduct Authority's Mary Starks says cooperation between industry, government and regulators is needed to make the freedoms work for consumers.
Two years on, our Retirement Outcomes Review looks at how the market is changing, particularly for people who do not take regulated financial advice.
Changes since the pensions freedoms
The pension freedoms have shifted the landscape for both savers and the pensions industry. Our research found that savers have welcomed the freedoms and made use of them to access their savings in new ways.
With over 1m pension pots accessed since the freedoms came into effect, the majority (72 per cent) were accessed by consumers under 65, and over half (53 per cent) were fully withdrawn. Flexible drawdown is now twice as popular as annuities.
We found a general lack of trust in pensions – this cannot be a good thing
These decisions are just one part of a broader savings and wealth picture. Typically the pots withdrawn were fairly small and consumers had other sources of retirement income, such as a defined benefit pension or property.
Moreover, most consumers were not taking their cash to spend it – instead many moved it into Isas or invested it elsewhere. There were very few Lamborghinis in sight, and many did not even treat themselves to a holiday.
Emerging issues
It is still early days, with both savers and the industry adjusting to the reforms. Also defined contribution pension pot sizes are projected to grow over time and become a more important provision for retirement. Looking to the future, there are two emerging issues that cause us concern.
First, we found a general lack of trust in pensions – this cannot be a good thing, particularly when it leads people to withdraw their cash when they might be better off keeping their savings invested.
Second, we found people following the ‘path of least resistance’ and buying drawdown from their pension provider without looking around for a better deal. This seems to partly be because people who are focused on accessing tax-free cash are not necessarily actively choosing what to do with the rest of their money. Also drawdown is complex and difficult to compare to get the right product and investment strategy.
The way forward
In our interim report, published in July, we set out some options to address these concerns. We have looked at how to support consumers accessing their savings without advice, so they can be confident in making these important choices.
But we also recognise that many of us struggle with complex financial decisions, and might prefer the option of a default or off-the-shelf investment pathway rather than having to make a choice.
FCA cites ways to crank up consumer protection amid competition concerns
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.
Getting this right requires cooperation with industry, government, fellow regulators and consumer groups. We have been working with these groups and will continue as we work towards publication of our final report and proposals in the first half of 2018.
Mary Starks is director of competition and chief economist at the FCA
© Financial Conduct Authority
