Accessing pension pots early 'the new norm', says Financial Conduct Authority

Lack of consumer trust in pensions could lead to some savers missing out on more money


Accessing pension pots early has become the "new norm", according to the City regulator.

But the Financial Conduct Authority (FCA) warned that a lack of consumer trust in pensions could lead to some savers missing out on more money or paying too much tax.

The regulator has been looking at how the retirement landscape has changed since the launch of pension freedoms, and its interim findings said nearly three-quarters (72%) of pots that have been accessed are by consumers under 65.

The pension freedoms were launched in 2015 to give over-55s more choice over how they use their pension pot, rather than being required to buy a retirement income called an annuity.

The FCA said over half (53%) of pots accessed have been fully withdrawn, but these sums are mostly small, with 90% below £30,000, and 94% of consumers making full withdrawals had other sources of retirement income as well as the state pension.

It said pensions drawdown has become much more popular. Twice as many pots are moving into drawdown than annuities.

The review also identified issues with the market and said innovation with retirement products has been limited so far, particularly for the mass market.

It said people who access their pots early without taking advice typically follow the "path of least resistance", accepting drawdown from their current pension provider without shopping around.

Consumers are increasingly accessing drawdown without taking advice, the FCA said. Before the freedoms, 5% of drawdown was bought without advice compared with 30% now.

Drawdown allows savers to take an income from their pension fund while keeping it invested.

The FCA said: "Drawdown is complex and these consumers may need more support and protection."

Another issue is that over half (52%) of fully withdrawn pots were not spent but were moved into other savings or investments.

The FCA said: "Some of this is due to a lack of public trust in pensions. This can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits."

Meanwhile, providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future.

"Ensuring this market works well will require co-operation across Government, regulators, the industry and consumer bodies."

The FCA is inviting feedback and aims to publish a final report in the first half of 2018.

The Association of British Insurers (ABI) said its own data did not support the view that accessing pension savings early has become the new norm.

It said that while more than 100,000 pots are being accessed every quarter, 4.7 million defined contribution (DC) pots belonging to those aged 55 and over are not touched.

Director general of the ABI Huw Evans said: "Providers responded swiftly to the pension reforms, which did introduce considerably more choice for savers.

"The market and services are still evolving and the sector is committed to helping customers make informed decisions."

He said work already under way by the ABI and its members includes a project progressing ideas on how a flexible income drawdown comparison tool would work.

Tom McPhail, head of policy at Hargreaves Lansdown, said: "We'd like to see more emphasis placed on helping investors make good decisions for themselves."

John Perks, managing director of life and pensions at LV=, said: "Professional financial advice is by far the best way to ensure people are able to make the right decisions at retirement and that their income meets their needs in the long run, but too few people take it up.

"LV= has repeatedly warned that without action to address this issue we will face a 'mis-buying' crisis of consumers making important financial choices without adequate support."

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