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Response to FCA retirement income study

Andrew Tully, pensions technical director, Retirement Advantage
Moving money from a tax-efficient pensions environment to place into other savings or investments is frankly bonkers
Andrew Tully, pensions technical director, Retirement Advantage

The FCA has published interim findings of a study looking at the retirement income market –

In summary, the review found that:

  • Accessing pension pots early has become ‘the new norm’. Almost three quarters (72%) of pots that have been accessed are by consumers under 65. Most are choosing to take lump sums rather than a regular income.
  • Over half (53%) of pots accessed have been fully withdrawn. However the fully withdrawn pots are mostly small with 90% below £30,000, and 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension.
  • Drawdown has become much more popular. Twice as many pots are moving into drawdown than annuities.

And has identified five issues:

  • Over half (52%) of fully withdrawn pots were not spent but were moved into other savings or investments. 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.
  • Consumers 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. Before the freedoms, 5% of drawdown was bought without advice compared to 30% now. Drawdown is complex and these consumers may need more support and protection.
  • Providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition over time.
  • Product innovation has been limited to date, particularly for the mass market.

Andrew Tully, pensions technical director, Retirement Advantage commented: ‘Two years on since the seismic changes to the pensions market were introduced, a worrying new norm is beginning to emerge. Far from valuing the income the pension was designed to generate, it would seem people have been taking full advantage of grabbing the cash early. This is back up by the government’s own stats on the additional tax take, which by their own admission is way higher than they expected. Many experts thought having to pay income tax on withdrawals would prove to be a natural brake but this clearly isn’t the case. Moving money from a tax-efficient pensions environment to place into other savings or investments is frankly bonkers.

‘For those people looking to generate an income, the market has swung towards drawdown, but the lack of shopping around pervades the market and is an issue whatever product you choose. We’ve highlighted people can lose £8,460 in income over the course of an average retirement by not getting advice and securing the best annuity for their circumstances. While drawdown is not a one off purchase like an annuity, it is still important people look around for the right product, as you can easily find yourself caught out by high charges.

‘For people looking to combine the best of both worlds, securing peace of mind through a guaranteed income, and flexibility through drawdown, our Retirement Account is the only obvious highlight of product innovation since the pension freedoms, and is proving to be really popular.

‘Seeking professional financial advice is key to ensure people not only buy the right product or combination of products, but also ensure their retirement plans remain on track.’