FCA looking closely at non-advised drawdown

Posted By: Phil Handley DipPFS AwPETR On November 12, 2015 Category: FCA non-advised drawdown

The Financial Conduct Authority (FCA) is looking to speed up a review of the non-advised annuity market. Many of the main pension providers have launched a non-advised proposition since the pension reforms came into force in April, and their impact hasn’t yet been assessed.

The FCA is worried that the same issue is playing out with drawdown as it was with annuities. People just aren’t shopping around for a better deal and losing out as a consequence.

Retirees are sometimes being charged above average fees by pension companies, which is more than they could have expected to pay taking qualified financial advice.

Arranging a drawdown plan on a non-advised basis gives up the right to suitability protection, which is provided through an IFA.

Roy Percival, FCA senior technical manager stated of the review “On the non-advised side, we will look at whether customers are getting the right information and whether they are making the right decisions based on that information”.

He went to say

“There has been a big move away from annuities to drawdown. There are concerns about non-advised drawdown – that clients are in a drawdown product which needs managing and thinking about, but they have not got an adviser”.

“In the decumulation space, there’s concerns that products become more complex and carry higher charges”.

In the years before the pension reforms, people took out annuities. Around 65% stayed with their existing providers, sometime resulting in up to 60% less income than they would have received by shopping around.

There were moves by the Association of British Insurers (ABI) to encourage its members (the pension companies) to issue guidance explaining the benefits of the Open Market Option (the ability to shop around with your pension).

Unfortunately, shortly after the ABI started to make progress the annuity market was kyboshed by the chancellor in the March 2014 budget.

We now have a situation again where pension companies are taking advantage of peoples lack of knowledge or fear to take advice, and are being penalised by not taking an appropriate or expensive drawdown plan.

Standard Life said it was its ‘fastest-selling solution ever’, little is known of its clients suitability and their full understand of the risks involved.

Drawdown is a complex product. It involves both investment and sequencing risk. There are other considerations also such as correctly stating beneficiaries to ensure the funds can be passed on tax efficiently on death (simply stating a spouse can lead to massive tax implications if funds are also intended for other family members)

Prior to April, drawdown wasn’t offered on a non-advised basis. It seems to be a direct result of pension companies trying to recoup profits which have been lost through annuity sales.

There are undoubtedly many people who are completely capable of running their own drawdown plan. The review is to ensure those that are unsure have appropriate protection.