The Financial Conduct Authority (FCA) has published interim findings of the Retirement Outcomes Review, the first major comprehensive study into how the retirement income market is changing since the pension freedoms were introduced. The review considered how the income market is developing, focusing mainly on those who do not take any advice.
They found that consumers welcomed the pension freedoms and over one million defined contribution pension pots had been accessed since the reforms took place. The early access of pots has resulted in 72% being accessed by consumers less than 65 years of age – most of whom took lump sums. Over half of the accessed pots have been fully withdrawn and over half of these have been transferred into savings or investments. No evidence was found of persons being careless with their pension savings.
Since inception, tools have been developed to help consumers understand the changes. In addition simpler flexi-access drawdown products, which consumers can buy without taking financial advice, have been introduced.
The review found however, that the market is still growing and adjusting to the changes, leaving certain issues identified - those who withdrew their pots did so partly because of mistrust of pensions and they accepted the drawdown option offered by the pension provider without shopping around; 30% did not take advice on how to manage the drawdown and, as the decision is complex, it is questionable whether further support is required.
It was found that some annuity providers were leaving the market, reducing choice for consumers and weakening competiveness. This could result in more charges/tax being paid, consumers investing unsuitably, missing out on valuable benefits or running out of savings sooner than expected.
The FCA has stated that they will carry out further assessment of the harm these issues may cause and consider remedies.
Commenting on the interim finds of this review, Tim Gosling – Policy Lead of the 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."
