Following an in depth review, City regulator, the Financial Conduct Authority (FCA)has concluded that more needs to be done to ensure that those taking advantage of new pension freedoms do not do so without taking appropriate advice; it has called on robo advisors to bring innovation to pensions as they roll out their range of wealthtech propositions.
More than two years after the government brought in a range of pension freedoms, FCA has concluded that accessing pension pots early has become the norm, but with the TUC warning that millions of workers risk being ‘plunged into insecurity in old age’ there is pressure on it to deliver guidelines and controls to protect the rush of people taking their pension pot early without taking advice.
The FCA’s findings suggests that fears of queues outside Harley Davidson showrooms or Fred Olsen offices were unfounded; in more than half of cases where all the money was taken out of a pension pot, the cash was shifted into other savings or investments, partly because of a ‘mistrust of pensions’.
The FCA found that almost three-quarters (72%) of the pots accessed since the freedoms came in were held by people under 65; most take lump sums rather than a regular income, with more than half (53%) of the pots accessed fully withdrawn
millions of workers risk being ‘plunged into insecurity in old age’
The freedoms introduced in April 2015 abolished the requirement to purchase an annuity, leaving pensioners able to do what they will with their retirement money; however, those withdrawing large sums can incur hefty tax bills, and such decisions should rarely be made in the absence of some form of advice.
In its report, the FCA said: ‘several factors motivated consumers to access their savings early, including a perception that ‘everyone is doing it’ and a general climate of mistrust.
Moving cash from a pension into another savings or investment vehicle ‘can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits’.
The report found that income drawdown – taking an income whilst the pension pot remains invested – has become much more popular but identified that the number of drawdown plans bought without advice leapt from 5% before the freedoms to 30% now: ‘drawdown is complex … There is a question about whether further support and protection is needed to manage drawdown effectively,’ said the FCA.
In response, TUC general secretary, Frances O’Grady, said: ‘This is a damning verdict on so-called ‘pensions freedom’. Workers who are facing insecurity in their working lives now risk being plunged into insecurity in old age. Savers are increasingly dipping into their pots early. And others are following the path of least resistance and risk buying rip-off products.’
These findings come less than a month after FCA announced that it would be tightening rules to protect those seeking to cash in defined benefit schemes, after 80,000 people did so in a year.
Once considered the blue riband of the pensions world, DB, or final salary schemes were highly prized and those seeking advice on cashing them in would usually have been warned off; however, transfer values are at record levels and FCA is concerned that people will be lured into making decisions that could be disadvantageous to them down the line. Read more here
For those choosing to take control of their pension pot, the perennial challenge is to achieve investment returns that deliver an income that is at least as favourable as that offered by an annuity, and ideally far higher; FCA concludes that there has been little innovation when it comes to retirement income, and believes robo advisors have a role to play.
the perennial challenge is to achieve investment returns that deliver an income
FCA noted that whilst robo advice is rapidly expanding in the UK, there are few providers that offer pension plans, saying that it would expect the opposite due to the low-cost of automated wealth services.
With Scalable Capital the latest to announce it would be launching a pension, Muckle’s comparison table identifies a number of robo advisors that offer SIPP wrappers including Investec’s Click and Invest, ETF Matic, Evestor and Nutmeg; these are primarily designed for the accumulation phase and can be operated to deliver a source of income in retirement, but thus far there has been seemingly little focus on bespoke income generating accounts where capital preservation and low-risk investing may be considered high priority.
‘Currently automated advice is more popular in wealth management,’ said the regulator. ‘However, it is expected that due to the lower cost and convenience it could become more popular in larger markets, including retirement income.’
The FCA also noted that pension drawdown schemes, where funds are kept in the stock market, is an area of concern and could require intervention.
Christopher Woolard, executive director at the FCA ‘Since the introduction of the pension freedoms, the retirement income market has changed substantially; 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.
Tim Middleton, of the Pensions Management Institute, says it is concerning that so many retirees have not sought professional advice and the government should consider an advice mandate.
‘We are moving into an era where an increasing number of people are largely or wholly dependent on Defined Contribution pension arrangements to fund their retirement,’ he said. ‘Given the growing reluctance of members to opt for the security provided by annuitisation, it is crucial that drawdown is controlled prudently if longevity risk is to be managed effectively.’
With robo advice being extended to so many aspects of our financial lives, it would seem logical that it should be used to deliver income in retirement.
With traditional advisers propounding a glide path of cash and fixed income investments on the approach to, and beyond, retirement, it appears to be something that the robo advisors could comfortably accommodate; perhaps this will be on the agenda as these relatively nascent companies eye a much longer term and broader relationship with their customers.