FCA and Freedom Failures – Making the Reforms Work For All

Since the government announced pension freedoms back in 2014, the Financial Conduct Authority (FCA) has faced the challenge of making the ambitious reforms work for everybody. They recently published the final part of its Retirement Outcomes Review which consists of over 200 pages of study and consultation. Let’s take a closer look.

Building the foundations

Two proposals received more support than others from the pensions industry, which were the need for providers to establish default investment pathways and send wake-up packs to consumers when they hit 50.

To improve wake-up packs, the FCA believes that a one-page document which can be read and understood by everybody should be included in the packs, as well as risk warnings. The FCA also wants the packs to be sent to customers every five years until they choose to access their pension pot.

The organisation also writes that providers which consider standardised objectives should offer consumers ready-made drawdown investment pathways. This helps address an issue found by the watchdog’s research when comparing the behaviour of advised and non-advised consumers.

The research shows that when consumers accessed their pots without taking advice, 94% accepted the drawdown option. However, when consumers sought help, only 35% chose to accept the option. This shows that consumers are not shopping around, which is an area the FCA is keen to change.

But this isn’t the only issue recognised by the organisation. Research shows that a third of non-advised drawdown consumers are entirely holding cash. While this could suit those who are planning to drawdown their pension pot over a short period, others could potentially receive an income pot of up to 37% higher just by moving to a mix of assets. Therefore, the FCA wish to encourage more suitable investments.

Has the FCA delivered?

Steve Webb, the Royal London director of policy, said that the FCA’s review underlines ‘the biggest dangers to savers, such as locking their money into low-return cash investments and the risk of losing out by not searching for financial advice’. He added that ‘the recommendations are a balanced package that preserves the spirit of the pension freedoms while trying to make them work better, especially for customers who do not take financial advice’.

Simon Harrington, a Personal Investment Management and Financial Advice Association senior policy adviser, agrees with Webb’s view that the FCA has struck the right balance between protection and choice. He believes that ‘the introduction of multiple investment pathways overseen by strong governance should encourage consumers to fully understand their retirement options without fear of making the wrong decision’. However, he is critical of the FCA’s decision to not ensure that tax-free pensions advice allowance is pointed out in the wake-up packs – alongside a requirement for providers to offer it.

The problem with drawdown charges

Other commentators are eager for providers to be forced to develop a pensions passport and for drawdown charges to be broken down into pounds and pence. This would push consumers into taking full responsibility for their own retirement choices.

Consumers are unaware of the range of drawdown charges, which the FCA believe is a big problem. Research outlined that products can have up to 44 charges linked to them, which according to the regulator, makes it challenging for consumers to compare products and shop around for the most suitable option. This leads to little competitive pressure on providers to offer better deals.

The FCA is concerned that consumers are paying too much in charges due to the lack of competition between providers. Their research found that costs ranged from 0.4% to 1.6%  between providers for non-advised drawdown consumers. In comparison, some workplace defined contribution scheme charges are capped at 0.75%.

Self-invested technical specialist James Jones-Tinsley believes that ‘stating drawdown charges clearly and in one place will both focus consumers’ minds and help tackle the opaqueness in drawdown charges across providers.’

It’s evident that the FCA is passionate about making sure drawdown consumers are offered adequate advice or guidance – which is a step in the right direction. If you’re concerned about your pension pot or retirement and need reliable, trusted advice, why not get in touch with Cowens Financial Architects? With over 25 years of experience in financial planning, we can help you achieve financial freedom and the lifestyle you desire.