Accessing pension pots early ‘new norm’

Accessing pension pots early has become ‘the new norm’ according to the interim findings of a review by the Financial Conduct Authority (FCA) into how the retirement income market is changing since the new pension freedoms were announced in April 2015

The regulator says its retirement outcomes review suggests that almost three quarters (72%) of pots that have been accessed are by consumers under 65. Most are choosing to take lump sums rather than a regular income.

Over half (53%) of pots accessed have been fully withdrawn. However the fully withdrawn pots are mostly small with 90% below £30,000, and 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension.

In addition, pension drawdown has become much more popular. Twice as many pots are moving into drawdown than annuities.

The FCA says that while it is still early days for the market, the review identified five issues. The first is that half (52%) of fully withdrawn pots were not spent but were moved into other savings or investments. The regulator argues that some of this is due to a lack of public trust in pensions, and says this can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits.

Secondly, the FCA found that consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around.

The third concern is that consumers are increasingly accessing drawdown without taking advice. The FCA says that before the freedoms, 5% of drawdown was bought without advice compared to 30% now.

The fourth issue is that providers are continuing to withdraw from the open annuity market, which the FCA says could bring a risk of weakened competition over time. Finally, the regulator also suggests product innovation has been limited to date, particularly for the mass market.

Christopher Woolard, executive director of strategy and competition at the FCA, said: ‘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.’

The FCA plans to gather further evidence on consumer outcomes to assess whether additional protections should be put in place for consumers who buy drawdown without advice. It will also be looking at whether consumers pay high charges and have ended up with unsuitable investment strategies.

In addition, the regulator is planning to ask government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot, along with ways to make it easier to compare and shop around for drawdown.

The FCA is inviting feedback on the initial findings and recommendations, and aims to publish a final report in the first half of 2018.

Responding to the findings, the Association of British Insurers (ABI) said its data does not support the view that accessing pension savings early has become 'the new norm'. ABI statistics show that while over 100,000 pots are being accessed every quarter, 4.7m defined contribution pots belonging to those aged 55 and over are not touched.

Huw Evans, ABI director general, said: ‘Providers responded swiftly to the pension reforms, which did introduce considerably more choice for savers. The market and services are still evolving and the sector is committed to helping customers make informed decisions.

‘Work already underway by the ABI and its members includes a project progressing ideas on how a flexible income drawdown comparison tool would work, alongside efforts to increase consumer engagement with pensions and create a ground-breaking pensions dashboard service. 

‘The report makes clear the importance of access to high quality advice and guidance, reinforcing how critical it is that the government and FCA focus on delivering the objectives of the financial advice market review, and more.’

The FCA’s Retirement outcomes review: interim report is here.

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