Pension passports proposed amid plans to protect retirement pots

Many people need more support when choosing how to use their pension savings - as they are "now required to make more complicated decisions than ever before", the City regulator has said.

The Financial Conduct Authority (FCA) has been looking at how the sector has been working since the pension freedoms were introduced in 2015.

It wants to see improvements in the clarity and timing of communications from firms before people make decisions about what to do with their pension pot.

The FCA is proposing that "wake up" packs should be sent to people from the age of 50 and then every five years until the customer has fully accessed their pension pot.

These would have to include a single page summary in clear language, sometimes called a pensions passport, and firms would also include specific retirement risk warnings at the same time as the new packs.

The pension freedoms give over-55s a wider range of choices over how they use their pension pot, rather than being required to buy an annuity retirement income.

The FCA said the proposed new communications would help consumers engage with the risks and choices they face and prompt them to access support and guidance.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "We know that the choices introduced by the pension freedoms have been popular with many consumers.

"However, they're now required to make more complicated decisions than ever before.

"Many people need more support when making choices.

"The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand."

It is also inviting views on a more structured set of options for people drawing down their pension.

The regulator said "investment pathways" would help consumers consider what their retirement objectives are and ultimately end up with a more appropriate investment solution.

The FCA estimates that some drawdown customers could receive 37% more retirement income from their pot every year by investing in a mix of assets rather than cash.

The regulator also said it wants drawdown options to be good value for money - and it is proposing that firms include a one-year charge figure in pounds and pence in the key features illustration they provide.

It found that charges vary considerably and can often be "complex, opaque and hard to compare".

It said if firms fail to introduce investment pathways with appropriate charge levels, "the FCA has not ruled out introducing a cap on drawdown charges".

It said since the pension freedoms, it has seen substantial shifts away from annuities and towards taking drawdown without advice.

Twice as many pots have been used for drawdown than to buy an annuity. A third (32%) of these were accessed without advice, compared with 5% before the freedoms.

The report said: "We have seen that many consumers, particularly when focused on taking their tax-free cash, take the 'path of least resistance' and enter drawdown with their existing provider."

The FCA is also proposing those who have accessed their pension should receive information from their provider annually, whether or not they are currently drawing an income from their pot.

The FCA also believes this information should include charges paid in pounds and pence. It found some consumers do not receive annual information and for many who do, information on investment returns and annual charges is not given.

The regulator is consulting on some of the proposed measures.

It said investment pathways require further work to get the detail right - and it is seeking views before finalising the approach.

Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said: "Making sure savers do not sleepwalk into cash investments is an important step, as well as simplifying choices for savers at retirement."

He continued: "These recommendations are a proportionate and balanced package which preserve the spirit of pension freedoms whilst trying to make those freedoms work better, especially for customers who do not take financial advice."