Out-Law / Your Daily Need-To-Know

Out-Law News 2 min. read

FCA report shows extent to which pension freedoms have hit the annuities market


Twice as many pension pots are "moving into drawdown than annuities" and are mostly being accessed by savers under the age of 65, according to a report by the Financial Conduct Authority (FCA).

The regulator said, though, that it has some concerns that savers may not be obtaining "good value" when deciding what to do with their money without first taking financial advice. It said it plans to look deeper into the issue.

The FCA's comments were outlined in its interim report from its Retirement Outcomes Review (ROR) (122-page / 2.90MB PDF).

The ROR is part of a programme of work announced by the FCA to follow up on its market review of retirement income, which concluded in early 2015 just before new flexibilities in relation to pension access came into force. Those reforms allow members of defined contribution (DC) schemes more freedom to access their savings once they turn 55 without facing heavy tax penalties or necessarily having to purchase an annuity to give them an income for life.

As part of the review, the FCA is taking a closer look at how easily consumers can compare products and switch providers and how the reported increase in non-advised sales of more complex retirement products is affecting consumers, as well as the extent to which regulation is preventing product innovation and serving as a barrier to new market entrants.

In its interim report, the FCA revealed the extent to which pension pots are now being accessed, either in full or in part, by savers prior to reaching the age of 65. It said 72% of pension pots are accessed by savers under 65, with most of those people electing to withdraw their funds in a lump sum rather take a regular income when doing so.

According to the FCA, twice as many pension pots are "moving into drawdown than annuities". Before the pension freedoms reforms were introduced, 90% of pension pots were used to buy annuities, the regulator said.

However, the FCA said that this trend may reflect "limited competitive pressure to offer good deals" and said it intends to "to investigate further whether consumers are getting good value when they move into drawdown without taking advice".

"We will gather evidence on whether consumers pay high charges and have chosen unsuitable investment strategies," it said.

The regulator also warned that more than half of savers that fully withdraw their pension pots early may be paying "too much tax" because of their decisions to transfer the funds into other savings or investments, or spend it on property.

The FCA said it would ask the government to consider new proposals which would allow savers to gain access to some of the money in their pension pots early without having to make decisions on what to do with the remainder of those funds at that time. It said new measures to "make it easier to compare and shop around for drawdown" should be looked at.

The FCA acknowledged that many insurers and other annuities providers are "continuing to withdraw from the open annuity market" and said that this could weaken competition over time. However, it said it did not intend to intervene on the issue for the time being.

The FCA is due to publish its final report from its review in the first half of 2018.

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