The Financial Conduct Authority has identified several issues with the drawdown market in its latest report on retirement outcomes, which has led it to call for “intervention” to put the market on the “best footing for the future”.

The FCA found that accessing pension pots since the introduction of the pension freedoms has become the ‘new norm’, as 72 per cent of pots that have been accessed are by savers under the age of 65. Over half (53 per cent) of the pots withdrawn have been fully withdrawn, however, most of these are small, with 90 per cent below £30,000. Ninety-four per cent of consumers making full withdrawal had other sources of retirement income, in addition to the state pension.

Furthermore, drawdown has become much more popular since the pension freedoms were introduced, and twice as many pots are moving into drawdown than annuities. One of the reasons for transferring their pension into other savings or investments was down to mistrust in pensions.

However, the FCA is concerned that 52 per cent of fully withdrawn pots were not spent but were moved into other savings or investments, which it noted, can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits.

In addition, it said 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. And consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5 per cent of drawdown was bought without advice compared to 30 per cent now. Drawdown is complex and these consumers may need more support and protection.

Furthermore, the FCA said providers are continuing to withdraw from the open annuity market, which could bring a risk of weakened competition over time. It also noted that product innovation has been limited to date, particularly for the mass market.

Commenting on the report, FCA executive director of strategy and competition Christopher Woolard said: “Since the introduction of the pension freedoms, the retirement income market has changed substantially. This study looks at what has happened during this time, and gives us an early view of areas to keep a close eye on.

“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future. Ensuring this market works well will require cooperation across government, regulators, the industry and consumer bodies. We will work closely with stakeholders to make sure we are clear on the actions we are best placed to lead.”

Therefore, the FCA plans to investigate whether additional protections should be put in place for consumers who buy drawdown without advice. It will gather evidence on whether consumers pay high charges and have ended up with unsuitable investment strategies.

The regulator also aims to improve competition in non-advised drawdown by asking the government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot and consider proposals to make it easier to compare and shop around for drawdown.

It would also like the government to offer tools and services to help consumers understand their options after the pension freedoms and improve trust in pensions, primarily by building on existing initiatives such as the free guidance provided by Pension Wise.

The FCA is inviting feedback on the initial findings and recommendations, and aims to publish a final report in the first half of 2018.

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