Former Chancellor George Osborne’s pension freedoms announcement in March 2014 caught everyone on the hop – including the Financial Conduct Authority (FCA).

Just over three years after reforms which granted defined contribution (DC) savers total flexibility over how they spend and invest their hard-earned retirement pots from age 55 were introduced, the City regulator has announced its first major intervention into the market.

Key findings and areas of concern

The pension freedoms have fundamentally changed the decisions savers are making about their retirement funds.

While previously the vast majority of people bought an annuity – which provides a guaranteed income for life – since April 2015 the pendulum has shifted firmly towards staying invested in retirement through drawdown.

In fact, more than twice as many people now enter drawdown rather than buying an annuity.

Although the FCA acknowledges most people have welcomed this new found freedom, it is worried some are failing to engage with their pot and risk making poor decisions as a result.

For example, large numbers of savers are entering drawdown purely to access their 25% tax-free cash.

While for many people this will not necessitate a change in investment strategy or product provider, it’s important you are aware of how your fund is invested and review your portfolio regularly (at least once a year).

Lack of knowledge

Worryingly, the regulator found one in three people who had entered drawdown recently had no idea where their money was invested.

In addition, the FCA is concerned savers might be missing out on valuable returns by failing to invest their pot. According to the regulator, a third of non-advised drawdown savers are holding solely cash.

For some this may reflect concerns about the state of global financial markets, while others may be planning to take some or all of their pot soon and sensibly protecting themselves from stock market volatility. However, as a long-term strategy, being heavily in cash is unlikely to be sensible for most investors as inflation will eat away at the value of your capital.

Possible Remedies

In response, the regulator is planning some changes to the information you receive about your retirement options.

The retirement ‘wake-up’ packs containing information about your policy and options will be given to you at age 50 rather than 55, and you’ll keep receiving it every five years thereafter. In addition, the FCA will require providers to send savers a one-year charges figure prior to entering drawdown.

A one-page ‘pensions passport’ including all the information you need to shop around retirement income providers will also be added to wake-up packs.

Beyond this, the FCA is considering more radical interventions to protect savers who don’t engage with their drawdown fund.

These could include requiring providers to offer ‘default investment pathways’ designed for those who do not engage with their pension pot, creating rules so savers need to make an active choice about investing in cash and forcing firms to disclose the charges customers actually pay on an annual basis.

Tom Selby, senior analyst, AJ Bell

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