Ensuring a Good Life in Later Life

LaterLife

The introduction of Pension Freedom and Choice in 2015 feels like a long time ago now.  Back then the biggest fear was of pensioners blowing their pension pots on a supercar and running out of money. In the main, these concerns were overblown. The vast majority of people were just delighted to get their hands on some cash and in doing so, growing numbers have stumbled into the world of pension drawdown without perhaps understanding what a complicated financial product it can be.

Background

Drawdown had previously been the domain of those with large pension pots, supported by regulated financial advice. In fact, many pension providers would only permit customers to take out a drawdown product with advice and a minimum pot size. In addition, customers often went into ‘capped drawdown’ where GAD rates limited the amount of income they could take. Many of these in-built protections have now been swept way.

Pension providers have responded to freedom & choice by evolving their drawdown products to allow more flexibility, together with fewer restrictions.  As the number of drawdown policies sold has increased (to just over 90,000 and £11bn in assets for the 6 months to March 2018[1]), it was no surprise in June 2016 when the FCA launched the Retirement Outcomes Review (ROR).  Its purpose was to assess how the market was evolving, to address any emerging issues that might cause consumers harm and to put the market on a good footing for the future.  The FCA’s initial report found that many consumers struggled to make investment decisions or were insufficiently engaged.  This is leading to a lack of shopping around for a drawdown provider or making poor investment choices because there isn’t an off-the-shelf solution that was easy to understand.  A particular concern, is the number of customers keeping their fund in cash if they aren’t planning to start making regular income withdrawals.

Consultation on investment pathways

The FCA has proposed that offering non-advised drawdown consumers a small range of investment options (‘pathways’) – with carefully designed choice architecture – could be a simple way to help them choose a strategy that broadly meets their retirement income objectives.  The FCA’s consultation paper in January 2019[2] provided more detail on these pathways, including outlining the objectives against which investment strategies should be based:

  • Option 1: I have no plans to touch my money in the next 5 years
  • Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years
  • Option 3: I plan to start taking my money as a long-term income within the next 5 years
  • Option 4: I plan to take out all my money within the next 5 years

[1] FCA Data Bulletin https://www.fca.org.uk/publication/data/data-bulletin-issue-14.pdf

[2] https://www.fca.org.uk/publication/consultation/cp19-05.pdf#page=3

The consultation also explores how providers could be more transparent about charges in drawdown.  They have proposed that providers should issue consumers with the actual pound and pence charges they paid over the previous year.  This would enable customers to compare providers more easily.

What happens next?

The consultation closed in April and the FCA are due to publish final rules in July 2019.  Providers will then have 12 months to comply and introduce their investment pathways. 

Our view

We fully support the consultation as we have long believed that the financial decisions that pension scheme members are faced with at retirement are often much more complicated than those during their working lives.  Auto enrolment, which is built on sound behavioural finance principles, has taken many decisions out of members’ hands – your employer chooses the provider, government sets minimum contribution rates and trustees or pension providers make the investment decision.  You can sit back and relax, knowing you’re in safe hands.

Then suddenly, people are faced with deciding how to invest a (hopefully) large pot of money so that it provides them with a regular income for an unknown period of time.  This is not simply an investment challenge, but a much broader financial planning one.  The proposed investment pathways are a sensible first step at trying to simplify the choices people will have as they move into later life.

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