FCA consults on new rules around retirement choices

The Financial Conduct Authority (FCA) is consulting on plans to introduce ‘investment pathways’, as well as introducing new rules on ‘wake up packs’, in order to stop 100,000 consumers a year losing out on pension income.

The proposals published today, 28 January, will target consumers who do not take advice as they approach retirement, and will aim to give them a “range of investment solutions” which will “broadly” meet their objectives, while also disclosing charges made by pension providers.

The measures were first recommended by the FCA in its Retirement Outcomes Review in June 2018, and hope to ensure that consumers are better prepared when accessing pension freedoms.

Commenting on the proposal’s, FCA executive director of strategy and competition, Christopher Woolard, said: “The pension freedoms give consumers more flexibility in how and when they can access their pension savings; but that also means they have to make more complicated choices.

“Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the 'path of least resistance’ when entering drawdown. This can often mean that the rest of their drawn down pension pot is not invested in a way that meets their needs and intentions.”

Furthermore, the FCA has suggested that consumers’ pension investments are not defaulted into cash savings unless it is actively done so by the consumer.

According to Woolard, one in three consumers who have gone into drawdown are unaware of where their money is being invested.

“Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement,” he added.

As part of the “ready-made investment solutions”, consumers will be offered four objectives for their retirement pot, and a solution based on their choice.

The regulator said it expects firms to “challenge themselves” on the level of charges they impose on the investment solutions, or it will move towards imposing a charge cap.

Smaller drawdown providers will be able to refer investors to another provider, or the Single Financial Guidance Body’s drawdown comparator tool.

Wake-up packs, retirement risk warnings, reminder requirements and the annuity prompt come into force from 1 November 2019. The more transparent rules around drawdown products will be applied from 6 April 2020.

Royal London director of policy, Steve Webb, added: “These FCA rules are a sensible response to the risk of savers sleepwalking into seeing their hard-earned savings eroded by sitting in low-return cash investments.

“But there is still a problem where people cash out the whole pot and transfer it into a cash ISA or current account. It is clear that reckless caution, not Lamborghinis, is the big outstanding challenge with pension freedoms.”

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