By Jonathan Watts-Lay, Director, WEALTH at work
The FCA recently released new data which provides an interesting insight into the actions that individuals have been taking as they access their pension pot for the first time. The data was collected from all regulated firms that provide retirement income products since the beginning of April 2018 to the end of March 2019. Some of the main findings include;
- In total, 646,530 pensions were accessed for the first time to either buy an annuity, move into drawdown or take a cash withdrawal
- 55% of pensions were fully withdrawn
- 30% of pensions that were not fully withdrawn entered into income drawdown
- 11% of pensions were accessed to purchase an annuity
- Almost half (48%) of pensions were accessed without regulated financial advice or guidance being taken
- For pensions that entered income drawdown, 34% of plan holders did not take regulated financial advice although 9% received Pensions Wise guidance
- Less than half (46%) of pensions going into income drawdown were sold to new customers, rather than to existing customers with the firm.
The continuing popularity of freedom and choice in pensions amongst individuals is certainly clear from these findings. As we’ve known for a while and as acknowledged by the FCA, many more individuals are now opting for income drawdown over purchasing an annuity. Whilst this option brings much more flexibility, the downside is that without the expertise of how to manage it appropriately, it can be easy for employees and pension scheme members to make poor decisions which can create a permanent dent in their retirement income. For example, this could include paying more tax than necessary, underestimating how long their retirement savings will need to last, falling victim to a scammer or making ill-judged investment choices.
These risks are likely to be heightened by the number of individuals failing to seek regulated financial advice when accessing their pensions. The cost of taking advice is often blamed for this. However, many don’t realise that when they buy retirement products, there are charges involved which can cost just as much, if not more, than getting regulated financial advice. So the value of it can far outweigh the cost. After all, studies have shown that those who take regulated financial advice are more likely to increase their wealth than those who do not.
Alarmingly, the findings also indicate that many individuals are failing to shop around when purchasing income drawdown. Without shopping around, they could be at risk of not getting the best deal and end up with potentially less money in their pocket every month in retirement than what could have been the case. For instance, the charges may be higher than alternative options. Which? found last year that the difference between the cheapest and most expensive drawdown plans was a staggering £12,000 lost in charges over a 15 year period. But not only this, the choice of investments may not always be appropriate for an individual’s needs, meaning that they could lose out twice; so shopping around should always be a priority.
Whilst employers and Trustees can’t always guarantee employees and pension scheme members will always make the right decisions at-retirement, there is a duty of care and a regulatory requirement to have processes in place to help them understand how to protect themselves and make informed choices.
An efficient way to do this is to facilitate access to financial education and guidance at-retirement, as employees and members are more likely to make informed choices if they do; including being able to decide if they need further support such as regulated financial advice.
If this is done after a thorough due diligence process which includes sourcing a reputable firm and checking their regulatory record, speaking to other schemes or employers using their services, looking at member feedback and carrying out a site visit, employers and Trustees should then feel confident that they are doing everything within their power to ensure that the right level of support is provided to all employees and scheme members, at the right time.