Retirement Outcomes Review: No time to be sitting on the sidelines

We urge advisers to participate in the FCA’s Retirement Outcomes Review following the recent Interim Report

We recently saw the Financial Conduct Authority (FCA) publish interim findings of its Retirement Outcome Review. This is a study into the retirement income market and how this has changed since the introduction of pension freedoms in April 2015.

The decision was taken to undertake this review, which was launched in July 2016, as previous work had identified several issues that might arise due to freedom and choice. It is the first study of its kind and although the FCA focused on outcomes for consumers who do not take regulated financial advice, the ramifications of the review will be felt far wider. It is important therefore for all advisers and providers to be aware of what is being looked at.

The FCA’s report highlighted the following:

• Accessing pension pots early has become ‘the new norm’. Almost three quarters (72%) of pots that have been accessed are by consumers under 65. Most are choosing to take lump sums rather than a regular income.
• Over half (53%) of pots accessed have been fully withdrawn. However the fully withdrawn pots are mostly small with 90% below £30,000, and 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension.
• Drawdown has become much more popular. Twice as many pots are moving into drawdown than annuities.

Although it is still early days for the market, the report identified five important issues:

• Over half (52%) of fully withdrawn pots were not spent but were moved into other savings or investments
• Consumers who access their pots early without taking advice typically accept drawdown from their current pension provider without shopping around
• Consumers are increasingly accessing drawdown without taking advice. Before the pension freedoms, 5% of drawdown was bought without advice compared to 30% now
• Providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition over time
• Product innovation has been limited to date, particularly for the mass market.

There are some interesting findings in the report and we are very glad to say that there weren’t any major surprises. In particular, it was widely predicted that many investors with smaller pots, who would previously have taken annuities, would move to the non-advised drawdown route.

In the main the industry thinks about it from a sales / marketing / P&L point of view but for the investor, this is their livelihood and in many cases the only money, other than their State Pension, they will have to live on for the rest of their lives. Over one million defined contribution pension pots have already been accessed since the reforms came into force. This gives us all a huge responsibility to make sure that investors understand the implications of what they are doing and get the best outcomes possible.

The report suggested a range of ways to address the identified issues including:

• Further evidence gathering to assess whether additional protections should be put in place　for consumers who buy drawdown without advice. This will look at charges and investment strategies.
• Improving competition in non-advised drawdown, potentially enabling consumers to access their savings early without having to make a decision about the remainder of their pension pot.
• Make it easier to compare and shop around for drawdown.
• Tools and services to help consumers understand their options, improving trust in pensions and build on existing initiatives such as Pension Wise.

While we applaud the need to aid those that want to make decisions without financial advice, we believe that when making decisions on what is quite often a client’s largest asset, individual financial advice is essential. Each individual then understands what he or she is giving up and the implications of doing so. The FCA data shows that over 50% of investors are withdrawing their fund but then putting it in a potentially less tax efficient vehicle. This is of great concern to all of us within the planning profession and should be addressed.

Perhaps more innovation in the pension sector, and in particular around drawdown, would help instil more confidence in the sector however more products could just add increasing complexity to an already complex world.

The FCA has made some interesting observations and suggestions in its report, some of which were expected. The final report is due in Q2 2018 following a consultation that ends on 15 September 2017, and we would urge everyone to participate in this. Don’t just stand on the side-lines! The FCA genuinely wants to make the industry, and particularly income drawdown, better for all concerned.