The Financial Conduct Authority (FCA) has published interim findings of its Retirement Outcomes Review, which looks at how the introduction of the pension freedoms in 2015 has affected the way in which people access their retirement savings.
The pension freedoms allowed savers to access as much or as little of their pension fund as they wished, once they had reached the age of 55. The FCA says that, two years on, “accessing pension pots early has become the new norm”, highlighting that in 72% of cases where a pension pot has been accessed, the person making the withdrawal was below the traditional retirement age of 65.
In 53% of cases where a pension pot is accessed, the saver withdraws all of their funds. However, 90% of the fully withdrawn pots are worth £30,000 or less. In addition, 94% of those making full withdrawals claimed to have additional sources of retirement income, other than the state pension.
The finding that appears to be of greatest concern to the FCA is that in the majority of cases (52%), the funds from fully withdrawn pots were not spent but were instead transferred into other savings or investment vehicles. There may therefore be little evidence that pensioners are blowing their retirement savings on a Lamborghini, to paraphrase former pensions minister Steve Webb. However, this does mean that consumers could be missing out on tax benefits, or on higher potential growth, by moving the funds out of the pension environment. The regulator suggests that people may be doing this “due to a lack of public trust in pensions.” Lee Hollingworth, head of defined benefit consulting at actuaries Hymans Robertson described withdrawing funds from a pension only to invest them elsewhere as “totally irrational.”
Twice as many people now take out a formal drawdown policy as take out a traditional annuity. This is a major change from the situation prior to 2015, when more than 90% of people accessed their pension pot via an annuity.
Drawdown allows savers to access income and lump sums from their pension fund, while the remaining amount remains invested.
Another significant change here is that, prior to 2015, as many as 95% of those entering drawdown sought financial advice before doing so. Since the introduction of the pension freedoms, this has fallen to 70%.
The FCA comments on a number of ways in which these trends could be detrimental to consumers, including:
- Consumers who don’t take financial advice typically accept their pension provider’s drawdown offer, without shopping around for a better deal
- Drawdown is a complex area and the regulator is concerned about whether everyone choosing this option really understands what it involves
- Annuity providers continue to withdraw from the market, resulting in reduced competition
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.”
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.