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Are investment pathways for drawdown the right way forward?

8 July 2018

The FCA wants to introduce investment pathways for consumers entering drawdown as part of its drive to ensure consumers are receiving value for money. 

In its Retirement Outcomes Review, the Financial Conduct Authority (FCA) reported that one in three consumers in drawdown were unsure of where their money was invested. Meanwhile, a third of non-advised consumers were found to be wholly invested in cash, of which over half were likely to be losing out on income in retirement as a result.

As part of its consultation on how to address the issue, the FCA has recommended that providers offer three ready-made drawdown investment solutions. The pathways would be intended for consumers with fairly straightforward needs:

  • those who want money to provide an income in retirement;
  • those who want to take all their money over a short period of time; and
  • those who want to keep their money invested for a long period of time but may want to dip into it occasionally.

In its review, the FCA stated: “Our evidence suggests that a more structured set of options would help consumers engage with their investment decision, consider their retirement objectives and match their drawdown solution to these. We expect firms to develop investment pathways with consumers’ best interests in mind, including appropriate charge structures and levels.”

Commenting on the FCA’s review, Andrew Tully, pensions technical director at Retirement Advantage says: “I’m not a fan of default retirement pathways, but it is startling to note the FCA’s findings that over one-third of non-advised drawdown customers are wholly holding cash. While cash may be appropriate as part of a portfolio or as a short-term strategy, people using drawdown need to generate investment returns to mitigate the effects of inflation and charges.

“Much more work is needed to try to make sure these default strategies are appropriate for as many non-advised customers as possible.”

Steven Cameron, pensions director at Aegon, comments: “By their very nature, the pension freedoms mean people are accessing their pension savings in a wide variety of ways. Individuals shouldn’t be lulled into thinking picking from three broad categories of retirement intentions remove the need for them to engage further on investment choices.”

Rachel Vahey, product technical manager at Nucleus, echoes the sentiment, warning that investment strategies could never be more than a blunt tool.

“Multiple different pathways are needed to reflect the various ways people want to use their drawdown pot and their own personal circumstances. We believe the better answer is helping people access advice and guidance to make an investment decision personalised for them. It is important that any requirement to offer default investment pathways is appropriately set and should only be offered to the non-advised entering drawdown.”

As part of its drive to protect consumers from poor outcomes, the FCA said firms should also ensure consumers accessing drawdown make an “active choice” to be in cash, which it believes will protect consumers from choosing investments that are unlikely to be appropriate for their retirement plans.

Moreover, in an effort to help consumers compare their drawdown solution, the regulator said firms should provide a summary showing key information at the front of the key features illustrations (KFIs) which consumers receive, including a one-year charge figure in pounds and pence which is comparable across KFIs.

Wake-up packs

The FCA has said retirement ‘wake up’ packs should start from age 50 to increase engagement among consumers, and then every five years until the consumer has fully accessed their pension savings. The new ‘wake up’ packs will comprise of a one-page ‘headline’ document in easy-to-understand language. The FCA said it is also consulting on rules that would require the packs to include risk warnings.

Ian Browne, pensions expert at Old Mutual Wealth, comments: “Regular wake-up packs are sensible, but they will need to be simple and straightforward. This is a step in the right direction, but we need to continue to develop a guidance model that will encourage people to engage with their pensions to the same extent they do to the World Cup or Love Island.”

Tom Selby, senior analyst at AJ Bell, says the FCA was right to focus its immediate attention on a “long overdue” overhaul of retirement wake-up packs.

“We believe much of the literature issued to customers is barely read and poorly understood and have long called for a fundamental rethink in this area. Our own research points to a lack of engagement and understanding among many drawdown investors, with accessing tax-free cash often the priority,” he noted.

Decoupling  

As part of its review, the FCA said it would encourage the government to consider the merits of decoupling tax-free cash from other pension decisions. According to the FCA, separating the decision to take tax-free cash from the need to move into drawdown will let consumers put off deciding what to do with the rest of their pot until they’re ready to do so.

AJ Bell is in agreement that customers who want their tax-free cash shouldn’t be forced to make a decision about what to do with the rest of their retirement fund.

Selby says: “If someone doesn’t want to start taking an income, it seems odd that they are required to enter drawdown or buy an annuity in order to get their 25% tax-free lump sum. It would therefore be a positive development for savers if this unnecessary requirement was removed.”

However, Cameron adds: “The concept of ‘decoupling’ tax free cash from transferring into drawdown was always going to be challenging within tax rules and would have required complex administration and ongoing record keeping. Making it ‘too easy’ to take tax free cash early could also have encouraged more people to take this earlier than needed, leaving less funds to cover retirement.”