Over 50s are to be sent retirement 'wake-up' packs to give them more help and guidance on how to access their pension savings, following changes that were introduced in 2015.
The Financial Conduct Authority (FCA) had today unveiled a package of proposals to protect pension investors as they start to access their retirement savings, following its long awaited Retirement Outcomes Review.
While it acknowledges that the Government's pension freedoms introduced in 2015 give consumers more flexibility over how and when they can access their pension savings, this level of freedom has resulted in consumers having to make more complicated choices about their retirement - including how to invest their savings and when to withdraw the money.
The review hopes to address this complication and give consumers more guidance.
For more information see our Guide to Taking Your Pension.
What were the 2015 changes?
April 2015 saw the most radical changes to private pensions for a generation as the new pension freedom rules came into effect. Before, most people had to use their pension pots to buy an annuity, which gives you a guaranteed income for life. Now, anyone aged 55 and over can take the whole amount as a lump sum, paying no tax on the first 25% and income tax on the rest.
You effectively have five options when you take your pension. You can:
- Keep the cash in your pension – the default holding position until you're ready to take your money.
- Withdraw all the money in one go – the first 25% is tax-free and the remaining 75% is taxed as income.
- Take lump sums, leaving the rest invested in your pension until you need it – take cash as and when you need it, leaving the rest in your current pension.
- Take the tax-free cash then buy a drawdown product – take the whole 25% as a tax-free lump sum straight away and then with the remainder of the cash you buy an income drawdown product, which is an investment that pays you income, but also continues to allow you to withdraw lump sums if you need it.
- Take the tax-free cash then buy an annuity – this is a product that pays you an income each year for the rest of your life until you die. After that it's gone.
What are the FCA proposals?
The FCA is seeking comments on its proposals by 6 September 2018, with a view that the new rules will be put in place by January 2019.
Here are the key proposals:
- Sending out 'wake-up' packs earlier – The FCA wants people to be given better information before they access their pensions savings. It wants 'wake-up' packs to be sent by the pension provider from the age of 50, and every five years thereafter until the pot is fully spent. They are set to include a single page summary, known as a 'pension passport' and specific risk warnings.
- The introduction of investment pathways – The FCA says it wants people to be able to decide which investment is best for them and get a good deal on it. It's proposing that savers should be offered three ready-made drawdown investment solutions and have to make an active choice to leave their money invested in cash - as the risk of staying in cash over the long term is the pension fund won’t grow as much as it could, meaning less income in retirement. It also wants firms to say how much they will charge for their services in pounds, rather than as a percentage, to make it easier for consumers to compare.
- Those who have accessed their pot should be given an annual report – This should be sent whether or not they are currently drawing income from their savings pot and must include annual charges in pounds rather than as a percentage. It could also include a reminder of their chosen investment pathway and their ability to switch
The FCA says it is working closely with the Money Advice Service and Association of British Insurers to develop a drawdown comparison tool.
What does the FCA say?
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.
"This is an important market that is still relatively new and is continuing to evolve. This is not the end of the work we are doing and we will continue to keep the market under review as it develops."