The FCA’s latest data on retirement market income trends
07 Sep 2018
Commenting on the FCA’s latest data on retirement market income trends, published today, Stephen Birch, Partner says:
“It’s not surprising that we’re seeing a drop in the number of cash withdrawals as pot sizes increase. This is merely the beginning of a trend as we see more and more people retire with more reliance on DC savings and less on DB as we move into the future. Neither is it surprising that meaningful portion of drawdown sales remain non-advised. The cost of advice means it’s out of reach for most, and that’s a situation we’re unlikely to see improve any time soon. 90% of DC savers earn less than a £100k and have retirement savings of less than £200k. They cannot afford advice, and guidance they can access is not sufficiently clear nor specific to their personal circumstances to be helpful.
“People should have easier, more affordable access to advice or guidance around their pension options. While that may sound simple it is taking time for pension providers and advisers to step up to the mark. From getting hold of your pensions to knowing what to do with it and when, the processes are admin heavy, the jargon impenetrable and getting help is expensive. As a result, people are often making bad, sometimes irreversible, decisions about what to do with 30+ years of savings, which will have a lifelong impact.
“We agree with the FCA that the biggest area of concern is in the non-advised drawdown market, given the potential for poor outcomes amongst individuals. For the situation to improve there a number of measures we need. Firstly, more encouragement of shopping around, with providers to actively promoting the value of this by having to send details of the best available quote in the market. It’s madness we don’t have this in place already for drawdown, given that many more opt for this versus annuities post freedom and choice. When people choose ‘the path of least resistance’ and go with their existing, provider, there’s a greater chance of being ripped off. It didn’t work for annuities and it doesn’t work in drawdown. Second, we need a charge cap for drawdown. We have one of 0.75% in workplace DC accumulation and we see no reason why this shouldn’t the case for decumulation. Arguably the need is greater for drawdown when pots are at their largest at the end of the savings journey. Third, the industry must start viewing drawdown as a service, not a product. We need personalised solutions that work towards an individual’s goals. The FCA’s proposal of investment pathways to get people into appropriate funds based on duration of investment is a great step in the right direction. Investments should be aligned to goals and provided at low cost.
“And finally we need to support individuals to understand what a sustainable withdrawal rate is for them to avoid running out of money in later years. Variations in pot size, financial situations and longevity mean that sustainable withdrawal can look very different for different consumers. Understanding how long your pot needs to last is key to making good decisions. Yet baby-boomer men tend to underestimate longevity by 7 years and women by 10 years*. The need for tools that help people better understand and frame their income in the context of their life expectancy could not be greater. Longevity risk is not being managed in current non-advised drawdown strategies.”
*Hymans Robertson Research and Club Vita data