The Financial Conduct Authority has launched a consultation to stop those entering retirement through income drawdown, make poor investment decisions.
A problem has been identified where retirees are simply accepting their existing pension company’s drawdown product. Over 100,000 over 55’s per year are going into drawdown without seeking advice.
The stats show that since the pension freedoms were announced, one third have move their plan into drawdown but invested entirely in cash.
Cash is a great place to hold funds for short term objectives but will be eaten away by inflation over the medium to longer term. The returns on cash accounts are far less that the general cost of living increases, meaning the spending power of the pension saving actually decrease over time.
The resulting issue is that retirees may not be able to generate the income they need to last the course of their retirement.
The FCA is highlighting that by adopting a more diversified asset allocation spread between bonds, equity, property and cash, retirees could boost their savings by up to 37% over the term.
The proposals are looking to require schemes offering drawdown to offer retirees ready made portfolios. Those who wish to move into drawdown without seeking advice should be offered 4 alternative portfolios which vary in risk but are designed to provide a better return over the medium to long term.
It also wants to remove the option of cash as the default option for those who don’t make any investment decision immediately after moving into drawdown.
Christopher Woolard, executive director of strategy and competition at the FCA, says: “Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the ‘path of least resistance’ when entering drawdown.
“This can often mean that the rest of their drawdown pension pot is not invested in a way that meets their needs and intentions.
“We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. This leads to poor consumer outcomes.”
The four options outlined by the Financial Conduct Authority are:
- Those who do not plan to touch their money in the next five years
- Those who plan to buy guaranteed income with an annuity in the next five years
- Those planning to take long-term income from their pension within the next five years
- Those planning to cash in their whole pension within the next five years
The options, termed ‘pathways’ are designed to help non-advised drawdown customers select from four simple choices, but ones which meet broad retirement objectives. They aim to maximise income in retirement.
The 4 pathways won’t be the sole choice but ones which will help retirees make the decision to stay invested rather than select the cash option.
There is a risk that in some cases, keeping invested isn’t the right choice but for those who are seeking to make their pensions last, I could be a great help.
Those reaching retirement often know what the features of drawdown are and want to use the method for withdrawing their pension income but are often inexperienced investors. Designing a portfolio of investments from the many thousands on offer can be an overwhelming task, and the new proposals aim to aid in that process.
The regulator also wants to improve the so called ‘wake-up’ packs, which are sent to those reaching retirement age, 6 months before they do so. The packs are often confusing and contain marketing material as well as many application forms. There should be a universal way these are presented that are user friendly to those without experience of dealing with paperwork.
At compare drawdown, we welcome the consolation which is making steps to further protect consumers who are potentially making ill informed decisions.