The UK’s Financial Conduct Authority (FCA) has launched a consultation on a raft of measures intended to protect consumers, improve engagement, and promote competition in the retirement income market.
The consultation comes on the heels of an FCA report investigating how the pensions and retirement income sector has been working since the pension freedoms were introduced in 2015. The so-called pension freedoms refer to a change in UK tax rules designed to give people greater access to their pensions. The changes lowered the tax rate on drawing down pension income to marginal income tax rates, rather than the previous rate of 55% for full withdrawals. It also allows people to take 25% of their pension as a tax-free lump sum.
The FCA’s report found that although consumers have embraced the freedoms, some are still at risk of harm. For example, the FCA estimates that some drawdown customers could receive 37% more retirement income from their pension every year by investing in a mix of assets, rather than cash. The FCA also found that 60% of consumers not taking advice about drawdown were not sure or only had a broad idea of where their money was invested. Additionally, one-third of consumers were wholly invested in cash with around half of these likely to be losing out on income in retirement.
“We know that the choices introduced by the pension freedoms have been popular with many consumers. However, they’re now required to make more complicated decisions than ever before,” Christopher Woolard, the FCA’s executive director of strategy and competition, said in a release. “Many people need more support when making choices. “The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand.”
The FCA said the measures will help consumers when they make major decisions about what to do with their pension pot, as well as provide ongoing support to consumers once they have accessed their pension savings. The measures include improvements to the clarity and timings of communications prior to when people make decisions about what to do with their pension pot, as well as simplifying the options that people have and the ongoing communications they receive.
The FCA proposes that pension participants should receive what it calls “wake-up” packs from the age of 50, and then every five years until the customer has fully accessed their pension pot. The packs would include a single-page summary, sometimes called a ‘pensions passport,’ and firms will also have to include specific retirement risk warnings at the same time as the new packs.
This is designed to address the lack of consumer engagement and help consumers engage with the risks and choices they face, as well as prompt them to access the support and guidance they need.
The FCA is inviting views on the introduction of investment pathways for customers at the point of entering drawdown. It said it believes a more structured set of options would help consumers engage with the decisions they are making, consider what their retirement objectives are, and ultimately end up with a more appropriate investment solution.
“This is an important market that is still relatively new and is continuing to evolve,” said Woolard. “This is not the end of the work we are doing and we will continue to keep the market under review as it develops.”