Support call for ‘complex’ decisions on pension pots

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Many people need more support when choosing how to use their pension savings as they are “now required to make more complicated decisions than ever before”, the City regulator has said.

The Financial Conduct Authority (FCA) has been looking at how the sector has been working since pension freedoms were introduced in 2015.

The body wants to see improvements in the clarity and timing of communications from firms before people make decisions about what to do with their pension pot.

The FCA is proposing “wake-up” packs should be sent to people from the age of 50 and then every five years until the customer has fully accessed their pension pot.

These would have to include a single page summary in clear language, sometimes called a pensions passport. Firms would also include specific retirement risk warnings at the same time as the new packs.

The pension freedoms give over-55s a wider range of choices over how they use their pension pot rather than being required to buy an annuity retirement income.

The FCA said the proposed new communications would help consumers engage with the risks and choices they face and prompt them to access support and guidance. Christopher Woolard, executive director of strategy and competition at the FCA, said: “We know that the choices introduced by the pension freedoms have been popular with many consumers.

“However, they’re now required to make more complicated decisions than ever before.

“Many people need more support when making choices.

“The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand.”

The authority is also inviting views on a more structured set of options for people drawing down their pension.

The regulator said “investment pathways” would help consumers consider what their retirement objectives were and ultimately end up with a more appropriate investment solution.

The FCA estimates some drawdown customers could receive 37 per cent more retirement income from their pot every year by investing in a mix of assets rather than cash.

The regulator also said it wants drawdown options to be good value for money. It is proposing firms include a one-year charge figure in pounds and pence in the key features illustration they provide.

The FCA found charges vary considerably and can often be “complex, opaque and hard to compare”.

It said if firms fail to introduce investment pathways with appropriate charge levels, “the FCA has not ruled out introducing a cap on drawdown charges”.

Twice as many pots have been used for drawdown than to buy an annuity. A third (32 per cent) of these were accessed without advice, compared with 5 per cent before the freedoms.

The report said: “We have seen that many consumers, particularly when focused on taking their tax-free cash, take the ‘path of least resistance’ and enter drawdown with their existing provider.”

The regulator is consulting on some of the proposed measures.