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Retirement remedy

The Financial Conduct Authority is proposing ready-made solutions for drawdown investors, to prevent them from making poor decisions and defaulting into cash.

Up until recently, people reaching retirement were left with little alternative than to exchange their pension pot for an annuity – a fixed income paid out each year for life. But since April 2015, the rules have allowed people to use their defined contribution (DC) pension how they like.
This has enabled everyone over the age of 55 to choose how and when they take benefits from their DC pension, ranging from taking the whole fund at once, to taking lump sums as required, or drawing a regular income.

At the same time, the new freedoms have forced individuals to make complicated choices about their retirement, including important decisions on how to invest appropriately and when to draw income.

Admittedly, a minority of people are comfortable making those decisions, but the reality is that many people enter drawdown without necessarily being aware of the consequences or the investment risks. That’s why the Financial Conduct Authority wants to see a structured set of options introduced to help non-advised drawdown investors engage with the decisions they are making, consider what their retirement objectives are and, ultimately, end up with a more appropriate investment strategy.

These ready-made “investment pathways” are intended for individuals with fairly straightforward needs, such as those wanting an income in retirement, those who want to take the money over a short period, or those who want to stay invested and make occasional withdrawals. Investors who are confident making their own choices should still be allowed to do so, says the regulator.

Wake and shake

The proposal is among a package of remedies put forward by the Financial Conduct Authority following its review of the April 2015 pension changes. The review – based in part on its survey of 13,000 people – also suggests that ‘wake-up packs’ should be sent to savers from the age of 50 to ensure earlier engagement, and that those in drawdown should make an “active choice” to be invested in cash.

The regulator claims that a third of non-advised drawdown consumers are wholly invested in cash, and this is unlikely to be the best strategy for most of them. As the report states, “consumers holding all of their pots in cash could increase their annual income by over a third if they invested instead in a mix of assets, including equities, over a 20-year period”.

It also says it expects firms to have a strategy for dealing with consumers who have already been defaulted into cash, and that it is considering requiring firms to give regular warnings to those who hold cash for significant periods.

Between October 2015 and September 2017, nearly 350,000 pension pots went into drawdown, and almost a third of these did so without the benefit of any financial advice.1

“Clearly, drawdown is where the majority of the concern lies,” says Jon Parker, director at investment consultants Redington. “It is a complicated product involving many challenging, interrelated decisions. What is an appropriate investment strategy? What is a sensible withdrawal rate? How long am I going to live? How might the answers to these questions change over time?”

“The risks to customers of making poorly informed decisions at retirement are arguably greater and more varied than during their earlier years, so it is right that regulations keep pace with the evolving nature of people’s later-life finances,” he says.

The regulator has correctly identified non-advised customers as most in need of additional help and support, which is an endorsement of at-retirement advice. Indeed, those with larger pots, or multiple aims and objectives, should seek regulated financial advice long before making any potentially irreversible decisions.

“We are still very much in the foothills in this shift to DC and drawdown, so the numbers of people who need professional financial advice will only increase,” says Parker.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

1 Retirement Outcomes Review Final Report, Financial Conduct Authority, June 2018.

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