New pension rules will come into force from the 1st February for those approaching retirement under FCA (Financial Conduct Authority) regulation. These new regulations are designed to protect consumers who do not take regulated financial advice as the FCA are concerned that consumers often make poor decisions such as converting their pension investments to cash, which over the average retirement would see a reduction in value in real terms as the return on the cash fails to keep pace with inflation.
The idea is that consumers are presented with 4 possible objectives and depending on which of these objectives most closely mirrors what they wish to do will then dictate which ‘investment pathway’ they should follow. The 4 objectives are as follows:
- I have no plans to touch my money within the next 5 years
- I plan to set-up a guaranteed income (annuity) within the next 5 years
- I plan to start taking a long term income within the next 5 years
- I plan to take my money within the next 5 years
Pension providers will need to offer a default investment solution for each of these 4 objectives and ensure they are communicated to the consumer, making it clear what the charges are so that they can decide whether it suites their needs.
Jonathan Watts-Lay, Director, WEALTH at work, comments, “In theory this all sounds like a good idea, especially because the FCA found that one in three savers that choose income drawdown without taking advice were holding all their money in cash, which means it will lose its value over time. However, this also raises many issues which employees need to be aware of.”
He adds; “Firstly, it is important to check the fees and charges in the fund they are being moved to. There are rules about how much can be charged when saving into a pension if you are defaulted as part of Auto Enrolment in your workplace scheme but this isn’t the case in retirement. Whilst fees now need to be made much clearer, individuals need to take the time to check these fees and compare them to what other providers are charging.”
Watts-Lay warns; “One of the big problems we know from history is pre 2015 when most people only had the choice of buying an annuity, as opposed to some form of drawdown, they ended up buying it from their existing pension provider even though they could get a better deal elsewhere. For example before the pension freedoms, the FCA found that 8 out of 10 people could get more retirement income if they shopped around when purchasing an annuity. It looks like the same is likely to happen again but now with drawdown.”
He adds; “The second issue is that many people will have multiple pensions, potentially all being defaulted into different funds. As all providers will be offering different investment pathways and different pricing this may lead to a far from joined up strategy and cost far more than it needs to.”
Watts-Lay explains; “Finally, these investment pathways are incredibly broad categories, and whilst better than nothing, it is much better for employees to make proactive decisions about their retirement based on their own unique circumstances. These pathways are designed for those who do not take regulated advice, however I urge everyone to consider whether they should take advice; particularly if they have pensions and other savings which are worth tens of thousands of pounds, as whilst there is a cost to taking advice research shows that people are often better off when they do. Research found that taking financial advice on your pensions and investments could leave you nearly £50,000 better off in the space of a decade. Financial advice can help employees to understand how much they can afford to withdraw, how to withdraw from their pension without paying unnecessary tax and how to use other assets and savings to provide an income throughout retirement. It can also help individuals to adjust their investments as they go through what maybe 25 years or more in retirement.”
He adds; “Many workplaces now understand the need to support their employees as they approach retirement by facilitating access to financial education, guidance and regulated financial advice. This in turn can lead to better outcomes at retirement.”