New pension rules will come into force from the 1 February 2021 for those approaching retirement under Financial Conduct Authority (FCA) regulation.
These new regulations are designed to protect consumers who do not take regulated financial advice. The FCA are concerned that consumers often make poor decisions such as converting their pension investments to cash (which over the average retirement, would see a reduction in value in real terms as the return on the cash fails to keep pace with inflation).
The idea is that consumers are presented with four possible objectives and depending on which of these objectives most closely mirrors what they wish to do, will then dictate what ‘investment pathway’ they should follow. The four objectives are as follows:
- I have no plans to touch my money within the next 5 years
- I plan to set up a guaranteed income (annuity) within the next 5 years
- I plan to start taking a long-term income within the next 5 years
- I plan to take my money within the next 5 years
Pension providers will need to offer a default investment solution for each of these four objectives and ensure they are communicated to the consumer, making it clear what the charges are so that they can decide whether it suits their needs.
Jonathan Watts-Lay, Director, WEALTH at work, a specialist provider of financial education and guidance in the workplace supported by regulated financial advice for individuals said, “In theory this all sounds like a good idea, especially because the FCA found that one in three savers that choose income drawdown without taking advice were holding all their money in cash, which means it will probably lose its value over time and indeed, Andrew Bailey CEO of the FCA back in 2018 said, ‘Someone who wants to drawdown their pot over a 20-year period could increase their expected annual income by over 30% by investing in a mix of assets rather than just cash.’ However, this also raises many issues that consumers need to be aware of.”
Watts-Lay added, “Firstly, it is important to check the fees and charges in the fund you are being moved to. There are rules about how much can be charged when you are saving for your pension but this isn’t the case in retirement. Whilst fees now need to be made much clearer, you need to take the time to check these fees and compare them to what other providers are charging.”
Watts-Lay warns; “One of the big problems we know from history is pre 2015 when most people only had the choice of buying an annuity, as opposed to some form of drawdown, they ended up buying it from their existing pension provider even though they could get a better deal elsewhere. For example, before the pension freedoms in 2015, the FCA found that 8 out of 10 people could get more retirement income if they shopped around when purchasing an annuity. It looks like the same is likely to happen again but now with drawdown.”
He adds; “The second issue is that many people will have multiple pensions, potentially all being defaulted into different funds. As all providers will be offering different investment pathways and different pricing, this may lead to a far from joined up strategy and cost far more than it needs to.”
He explained, “Finally, these investment pathways are incredibly broad categories and whilst better than nothing, it is much better to make proactive decisions about your retirement based on your own unique circumstances. These pathways are designed for those who do not take regulated advice, however I urge everyone to consider whether they should take advice; particularly if they have pensions and other savings which are worth tens of thousands of pounds. Whilst there is a cost to taking advice, research shows that people are often better off when they do.
He concludes; “Research found that taking financial advice on your pensions and investments could leave you nearly £50,000 better off in the space of a decade. A financial adviser can help you to understand how much you can afford to withdraw, how to withdraw from your pension without paying unnecessary tax and how to use other assets and savings to provide an income throughout retirement. They can also help you to adjust your investments as you go through what may be 25 years or more in retirement.”