Pensions - Articles - Industry comments on FCA retirement income study

Industry comments on the FCA retirement income study from Barnett Waddingham, Royal London, PLSA and

 Malcolm McLean, Senior Consultant at Barnett Waddingham, said; “The findings of this Review are extremely worrying and reinforce the view that the new freedoms were introduced too quickly, without proper regard to the risks and consequences of wide-spread consumer detriment arising.

 “Particularly concerning is the fact that over half of fully withdrawn pots are not spent but are put into other savings or investments – indicating not only a lack of trust in pensions but the possibility of a deep misunderstanding of the tax and other consequences of mismanaging individuals’ pension savings.
 “It is significant that yet again we are learning that consumers are following the “path of least resistance” and simply accepting drawdown from their current pension provider without shopping around – often costing themselves thousands of pounds in the process.
 “There is a clear need for greater regulatory intervention in a market that is not working as well as was expected. Also a beefing-up of the advice and guidance services, to address the various issues that are continuing to emerge, needs addressing.
 “The FCA has identified a range of possible measures to address some of the emerging issues identified. Clearly, at this stage there is now no going back on pension freedoms. However, working with government and other stakeholders they need to proceed with a greater urgency, than they have already shown, to remedy more of the defects and make the system work better than it appears to be doing at the present time.”

 Gareth Evans, Head of Corporate Affairs, Royal London said: “The FCA found that over half of the pension pots that were fully withdrawn were placed in other savings products. This may not be the best option for these funds. Pension funds that have been switched to deposits or cash ISAs in most cases will not produce a real return and their value will be eroded through retirement. The FCA should be highlighting the disadvantages of holding cash over the long term.

 More disturbing is the rise in non-advised drawdown (up from 5% to 30% of cases according to FCA figures). Opting for income drawdown as the main source of retirement income involves a complex set of decisions. Priorities can change over the course of retirement. It is vital that those relying on drawdown for a major part of their retirement income receive impartial advice at retirement and on a regular basis. Only impartial advice will ensure an adequate and sustainable retirement income. FCA should consider making advice for larger drawdown cases obligatory.”

 Tim Gosling, Policy Lead: DC, Pensions and Lifetime Savings Association, said: "The FCA's interim retirement outcomes review makes for disturbing reading. Without timely action now, those retiring in the near future who are dependent on defined contribution (DC) pots and who have no access to advice will not receive the retirement they hope for.

 “We need two things. First, we need a smoother customer journey at retirement that makes the line of least resistance an income product rather than cash. This may mean a form of "soft" default, intended to preserve consumer choice but designed to connect savers to the income 84% say they want1.

  “Second, we need a new generation of high quality retirement income products. These need to have strong independent governance and be suitable for those needing an income but who do not have access to advice. Government and the FCA should be mindful of lessons learnt in the workplace pensions market after the 2013 Office of Fair Trading Report to ensure product quality and also ensure they are open to fresh thinking about how to stimulate the development of new products.

 “Over half (52%) of fully withdrawn pots have not been spent but moved into other retirement savings or investment vehicles – with associated tax, investment and benefit risks. The report suggests that this may be due to lack of public trust in pensions so we need to work hard to address this issue by helping the industry to evolve to meet the expectations of consumers saving for and transitioning into retirement.

 “The industry does not have long to get this right."

 Simon Laight a pensions expert at international law firm Pinsent Masons said: “The big issues identified by the report are the lack of trust in pensions, money ending up on cash deposit and the popularity of drawdown over annuities. 
 The pension freedoms were meant to increase the velocity of money - the speed with which money changes hands. Releasing wealth from being tied up in financial institutions would lead to more domestic goods and services being bought, in turn stimulating trade and leading to greater tax take. Tax take has increased, as money taken out of pensions is subject to income tax, but economic stimulation is absent. People generally have hung onto their money. This is their credit. Unfortunately, having the cash on deposit misses out on investment return and isn’t tax efficient.
 Blame paralysis envelopes providers. They are keen to create pathways that steer consumers towards staying sensibly invested, but fear being blamed if the perfect outcome isn’t achieved for everyone. Steps have been made towards a better balance on responsibility, but the government needs to do more. Regrettably it is now distracted by more existential issues.
 The construct of distribution channels, combined with the economic, regulatory and solvency cost of providing guarantees, means the business of annuity provision is generally less attractive for institutional investors. It is easier and more profitable to provide and distribute drawdown products, over annuities. Shame, as the concept of risk pooling is still beneficial to many consumers. The open market annuity journey has yet to be properly addressed. The system is stacked against annuity provision. This will become a national scandal, in future years”.

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