The Retirement Outcomes Review has been published today by the Financial Conduct Authority (FCA).
The study was launched in July 2016 and is the first look at the impact pension freedoms have had on the retirement income market.
The review (which can be found here) found that accessing pension pots early in now the new norm, with 72 percent being accessed by consumers under the age of 65. Over half the accessed pots have been fully withdrawn, but most of these were of small value (under £30,000) with the owner having access to other forms of income. Drawdown is now the popular choice with twice as many pots going into drawdown than into annuities.
The review pointed to five issues:
First, over half (52 percent) of the fully withdrawn pots were moved into other financial products such as saving or investments. This was put down to a lack of trust in pensions, but the saver could end up paying for this move in the form of tax or missing out on pension growth.
Second, those that did access their pot early took the ‘path of least resistance’ by not shopping around.
Third, drawdown is increasingly being taken without seeking proper financial advice, which could prove costly in the long run due to the complexity of drawdown.
Fourthly, there are fewer annuity providers in the market, which could weaken competition as time goes on.
Fifth is that there is now limited product innovation in the mass market.
The FCA says it has identified some measures to address these issues, which involve gathering more evidence to see whether more consumer protection is needed as well as better tools to help them understand the options.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:
“Since the introduction of the pension freedoms, the retirement income market has changed substantially. This study looks at what has happened during this time, and gives us an early view of areas to keep a close eye on.
“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future. Ensuring this market works well will require cooperation across Government, regulators, the industry and consumer bodies.
“We will work closely with stakeholders to make sure we are clear on the actions we are best placed to lead.”
Commenting on the review Tim Middleton, Technical Consultant at The Pensions Management Institute, said:
“That 30% of DC retirees are going into drawdown without having sought professional advice is grounds for serious concern. The Government should consider making advice mandatory for those with pots in excess of a set threshold. We are moving into an era where an increasing number of people are largely or wholly dependent on Defined Contribution pension arrangements to fund their retirement. Given the growing reluctance of members to opt for the security provided by annuitisation, it is crucial that drawdown is controlled prudently if longevity risk is to be managed effectively.”
Darren Philp, Director of Policy and Market Engagement at The People’s Pension, commented:
“Today’s FCA report on retirement outcomes shows that, faced with a daunting array of options, many are simply cashing in their pensions and potentially getting hit by a triple whammy of a tax bill, missed investment growth and loss of other pension benefits. This fits with findings from the “New Choices, Big Decisions” research from Ignition House earlier this year that shows that most people need either better access to low-cost, trusted advice, tailored decision tools or a regulated default option to ensure they are not sleepwalking into a poorer retirement. Good quality default options will be a vitally important backstop for most people so they know that if they are unable to make a decision, they will still end up with a good solution.”