The FCA’s Retirement Outcomes Review: spend, spend, spend… or not?
26 Jul 2017 - Estimated reading time: 5 minutes
The FCA's latest Retirement Outcomes Review tells us that over a million DC pension pots have been accessed since the Freedom and Choice reforms were implemented in 2015. It also states that 72% of those were accessed by people under the age of 65 and that 53% of pots accessed were fully withdrawn. This is perhaps not too much of a surprise as 90% of the pots that were fully accessed were under £30,000.
These are obviously interesting statistics, particularly for those of us who are in the business of designing pre-retirement investment strategies. But for me, there were three areas highlighted by the report that were of particular note.
Firstly, for most of the people accessing their pension pots at this stage, the DC pot is not their main source of income – many still have some form of DB pension which will be funding their retirement. It’s perhaps not surprising then that the DC pot is being accessed as a ready source of cash. This situation is likely to change pretty quickly though as the “DC generation” starts to hit retirement age.
Secondly, consumers who fully withdrew their pots did so partly because they did not trust pensions. This chimes with earlier research and for me, is probably the most worrying statistic to come out of the report. Where people are accessing their pots fully, over half of these are being transferred into other savings or investment products with, interestingly, little evidence of people squandering their pension savings. It’s very likely that much of the money that’s being withdrawn is being placed into savings or investment products that have either very low rates of interest or high charges. So people are giving up the returns (and probably ongoing contributions too) they would have earned in their company schemes simply to bring their money into their own “control”. This suggests that there is still significant work for us all to do in the industry to help people understand that the money they have invested in their company pension scheme is actually their money.
The final point that perhaps scared me most from the report was that the proportion of drawdown bought without advice has risen from 5% before the pension freedoms to 30% now. This is an area that the FCA has made it clear that needs to be addressed and has cited a number of measures it will consider implementing to better protect members. It’s likely that many of the people who are moving to drawdown will be those who have been paying the default contribution rate, been invested in the default investment and retiring at the default retirement age in their company schemes. Many (or in reality most) will be ill equipped to deal with the raft of complex decisions they will have to take in choosing their drawdown strategy.
The FCA states that getting things right in this area will require cooperation across the Government, regulators, industry and consumer bodies. This is undoubtedly true. But this will also take time. And in the meantime, more members will pass into potentially unsuitable products or will glide into strategies that will potentially leave them without any income apart from the State Pension in their latter years.
We need to tackle this issue as soon as is practically possible. In terms of our roles, we also need to give as much support as we can to members while they are still within workplace pension schemes to help prepare them as effectively as we can for the pensions maze that awaits them once they have accessed their pots.