New FCA legislation to ensure investors with self-invested personal pensions or non-workplace pensions do not leave too much of their pot in cash has come into force.
The new rules, which took effect 1 December, will see providers send a ‘cash warning’ to consumers with potentially “inappropriate” levels of cash in their non-workplace pension to warn them that their pension savings are at risk of being eroded by inflation.
Checks will be carried out on a three-monthly basis to see if a pension saver holds 25% or more of their pension fund in cash or cash-like investments for more than six months. Once a cash warning is sent, providers will not need to issue a further warning until at least 12 months later if the customer’s investments continue to be high in cash, the city watchdog said.
The rules apply to both advised and non-advised customers who are more than five years away from their normal minimum pension age and have at least £1,000 of their pension fund in cash or cash-like investments.
It follows the FCA’s 2022 Financial Lives survey, which identified that 4.2 million consumers hold £10,000 or more of investable assets mostly or entirely in cash despite having some appetite to take investment risk.
Rachel Vahey, head of policy development at AJ Bell, said: “Although these may give your clients a shock, there might be very good reasons they are holding a significant proportion of cash or cash-like investments, especially in these times of high interest rates. For example, they may be holding money for transaction purposes or in anticipation of investing.
“But if you think your clients may fall into this category it’s probably worth having a word with them before the cautionary letter drops into their inbox. You may want to remind them of their current investment strategy and make sure they know the provider’s warning may be coming.”
Vahey said the rules were finalised in 2022, when the world economy looked different and cautioned that as more people turned to cash as a savings asset over the past year due to high interest rates, there is a possibility some pension savers may be caught unawares by the new rules.
In addition, the FCA has introduced rules requiring SIPP and other personal pension providers to offer a ‘default’ fund to non-advised consumers, both when a consumer first takes out a pension and on occasions when they are presented with a list of investments to choose from.
The default fund has to be displayed prominently at the top of any list, although consumers are not obligated to choose those investments.
Vahey added: “The fund has to be appropriate for the target consumer market. It doesn’t have to include lifestyling and the FCA instead says this should only be included where it’s appropriate for the target market. This gives some welcome flexibility to providers not to include features their customers don’t need or want.”
