The FCA recently published the findings of its interim report on retirement outcomes. The aim of the report was to establish the effects of April 2015’s pension freedoms on retirement income. Back in 2015, legislation changed to allow a greater level of access to pension pots than ever before. Since then, those 55 and over have been allowed to access their pensions. The greater level of freedom has led to a shift in how consumers are preparing for retirement. In our overview of the report, we’ll be discussing these shifts that have occurred over the last two years and the potential problems which may emerge from this.
The Great British population is living longer than ever before, which among other things, flags the question of post-retirement expenses. We are now forced to contend with the possibility that retirement will have to be planned for far earlier in life. Future care costs, retirement age, the estimated size of state pension are all factors which are leading the population to think further ahead than ever. However, in this report, we will be focusing on the decumulation of retirement income. This being, the way that retirement income is being used rather than how it is being accumulated. As the size of the retired population is sure to grow over the next decade, this is a very pertinent issue. Discussing it now will allow controls to be put in place to avoid a scenario where we see elevated levels of post retirement debt.
The interim report drew the following overall conclusions.
- People are now accessing their pension pots earlier.
The public now has the option to dip into their pension early and they are taking it. Of the cross section surveyed, 72% of under 65s have already dipped into their pension pot. Many of these have taken lump sums.
- Many consumers are opting to fully withdraw their pension.
53% of consumers who accessed their pension early decided to withdraw the whole amount. However, 90% of these pots equalled £30,000 or less. Half of those withdrawn were funnelled into other savings or investments- not spent.
- Of those who withdrew fully, most had other sources of income in addition to the state pension.
Only 3% of those surveyed had stated that their withdrawn pension pot was their most significant source of retirement income.
- Drawdowns have begun to trump annuities
Before pension freedoms were introduced, around 90% of pots were transferred into annuities. Now, there are twice as many people opting for drawdowns than there are choosing an annuity.
The Emerging Issues
The report identified several emerging issues from the findings. One of the biggest problems in the market is the number of consumers who are making key retirement decisions without professional financial advice and therefore failing to consider possible tax implications. Other key issues are detailed below:
- Lack of Trust in Pensions
As there are a significant number of pensions that have been accessed early but not spent, it suggests that there is a definite lack trust in pensions. When interviewed, some respondents claimed that they felt that their pension pot wouldn’t grow as it should if left untouched. Others stated that the consistent change in regulation made them uneasy about what would actually be left for them when they reached retirement age.
- Lack of Product Comparison
We mentioned above that many consumers are withdrawing pension pots and reallocating the funds without professional financial advice. One of the reasons why this is detrimental is due to the lack of shopping around for a better deal. Independent advice allows you to choose the best pension product for you, from the whole of the market. However, many consumers are accepting the drawdown option put forward by their pension provider without checking if there is a better deal on the table elsewhere. 94% of non-advised drawdown sales were made to existing customers.
Those who take advice are far more likely to opt for that which provides the best deal, not the path of least resistance. This has sparked discussion over whether greater protections are needed for those who buy drawdowns without advice. Before 2015, this figure was just 5%. Now, it equates to 30% of the drawdown market.
- Lack of Innovation in the Market
Many annuity providers are leaving the open annuity market. Therefore, there are concerns over the level of competition in the market. Without competition, innovation often halts. Less effective annuity products make their way to the market which is ultimately bad for the consumer. The FCA has pledged to monitor the level of openness and competition in the market.
The Interim Retirement Outcomes report flagged a number of interesting changes in the pensions market, along with several concerns which may need to be addressed in time. Ultimately, we urge consumers to seek advice before making any significant changes to their pension pot. With greater freedoms comes a greater responsibility for safeguarding your income for retirement. By failing to consult professionals, you could find yourself at the mercy of high tax deductions and charges which ultimately lower your overall pot value. To learn more about your pension options or to discuss creating a financial plan, get in touch here.