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Consumers struggle with drawdown complexity

10 April 2018

Advice and investment pathways are necessary to avoid consumers putting themselves at risk, say commentators.

A new review by the FCA has found that demand for drawdown has risen, yet many consumers are struggling with the complexity of decision making around the rules.

In the review, the FCA said that while firms were providing consumers with the necessary information to help them make informed decisions, some consumers did not appear to be engaged with the information, potentially putting themselves at risk.

It warned that pension savers making decisions without advice could be exposed to investments that are too risky for them, or which do not create enough investment return. They also run the risk of running out of money in retirement if they are poorly informed about the risks of drawdown.

Commenting on the review, Steven Cameron, pensions director, Aegon, said: “These latest findings show that pension firms are providing comprehensive and timely information which is clear and fair. But despite this, not all customers are fully engaging with the information, increasing the risk of running out of money in retirement. This reinforces the benefits of seeking advice.

“Before the pension freedoms, the Government set limits and required pension providers to review policies every three years, and to reduce income if it looked like funds were being run down too quickly. In the new world, unless an individual has an adviser, there’s no-one checking progress. Managing retirement finances is hugely important, be it where to invest, avoiding paying unnecessary tax or reviewing how much income to take to avoid running out of money.”

Andrew Tully, pensions technical director, Retirement Advantage, added: “Many more people are choosing to go it alone but with this ability to dip into your pension like a bank account comes with many new risks.

“Income drawdown is now the default option to generate retirement income as people prefer flexibility to the guaranteed lifetime income that an annuity will provide. This option should come with its own set of health warnings including the risk that you can lose money as stock markets can go down as well as up over the course of your retirement. Drawdown also introduces the danger of withdrawing too much from your pension. You can combine income drawdown and an annuity to get the best of both worlds.”

The latest data from the FCA showed that drawdown sales are now twice that of annuity sales, with 37% of drawdown sales made without advice.

Tim Gosling, policy lead for DC, at the Pensions and Lifetime Savings Association, said the need for default investment pathways in non-advised drawdown is now clear.

“The FCA suggested this as a customer protection measure in the interim report of the Retirement Outcomes Review and we believe they should now follow through on that in their final report. In the future, the PLSA would like savers to benefit from a decumulation process that supports them in making good decisions throughout the course of their retirement. In particular we need to learn from the success of automatic enrolment and the power of defaults while still preserving retirees’ freedoms to act as they wish.”

The PLSA says trustees of pension schemes should be able to select a decumulation product relevant to the membership of their scheme and should flag up the product to their members at retirement, which it believes would offer a “clear path to a suitable income product for scheme members to follow if they choose.”

Gosling added: “Members would be encouraged to make an active decision; and no member would be moved into the sign-posted decumulation product or solution without their explicit consent.”


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