For many people deciding how to use their pension savings is one of the most important, and often scariest financial decision they will ever make. Whilst the pension freedoms introduced by the Government in April 2015 has given people much greater flexibility in how they can access their pensions, more choice has added to the complexity, and for many increased the anxiety over whether they are making the right decisions. There is a lot to consider, including: How and where should I invest my pension fund? When should I start taking income and how much can I afford to withdraw? Should I take my tax free lump sum up front? What about longevity risks, and potential later life care cost? Taxation? Death Benefits?
The Financial Conduct Authority (FCA) has launched a new consultation designed to protect consumers, improve engagement and promote competition in the retirement income market. This consultation has been published alongside their final report, part of the FCA’s Retirement Outcomes Review, which is a detailed look at how the pension industry has been working for consumers since the introduction of pension freedoms. One of the findings in the report is that since the pension freedoms there has been a substantial shift away from annuities and towards taking income drawdown without taking advice. Twice as many pots have been used for drawdown than to buy an annuity, and nearly a third of these were accessed without advice, compared to 5% before the freedoms. The report goes on to say that many consumers, particularly when focussed on taking their tax-free cash, take the “path of least resistance” and enter drawdown with their existing provider, and that as pension pots become bigger, those who do not engage effectively with the industry could lose out on income in retirement, through poor investment choices or paying higher fees and charges. In addition it noted that comparing the behaviour of advised and non-advised consumers presents a starkly different picture. 94% of consumers who accessed their pots without taking advice accepted the drawdown option offered by their pension provider, compared to only 35% of advised consumers. The FCA’s analysis found that charges for non-advised consumers vary considerably from 0.4% to 1.6% between providers, and are, on average, higher than in pension plans still accumulating, and that by switching from a higher cost provider to a lower cost provider, consumers could increase their annual income by 13%.
Furthermore the FCA says that they are also concerned about the high proportion of consumers fully withdrawing their pension pots to move savings elsewhere. In many cases, keeping money in a pension would have resulted in better investment returns, and paying less tax. Some consumers might also lose out on employer contributions and other benefits as a result.
The FCA’s research found that this behaviour was partly driven by a lack of trust in pensions, stemming from a range of factors including past pension scandals (where consumers tend not to distinguish between Defined Benefit schemes and Defined Contribution Schemes) and frequent changes to pension rules and tax treatment.
With retirement for many increasingly likely to last 30 years or more, it is not only your initial retirement choices that are crucial. Taking professional advice and having a holistic financial plan throughout your retired life could be one of the best financial decisions you make. At Wingate we can help you plan your retirement, keep that plan on track, and make sure that you avoid the poor decisions that can damage your wealth.
