Britain’s financial watchdog flags concerns about ‘pension freedoms’

Britain’s financial markets watchdog on Wednesday flagged a number of concerns about the way people are using their retirement savings since the introduction of new rules in 2015.

In the biggest shake-up of pensions regulation for decades, the so-called ‘pension freedoms’ allowed savers to access their pension pots early and removed the need to buy an annuity, or income for life.

Interim findings by the Financial Conduct Authority (FCA) one year into its Retirement Outcomes Review said it had identified five issues, mostly around the issue of advice and competition. A final report is due in the first half of 2018.

Accessing pension pots early has become the norm, it said, with most choosing to take their savings as a lump sum rather than a regular income, and with twice as many pots moving into so-called ‘drawdown’ funds, which allow a saver to take a regular income, than into annuities.

Fifty three percent of pots accessed were fully withdrawn, although 90 percent of them were small, below 30,000 pounds ($38,000), and most of those doing so had other sources of income in addition to the state pension, the FCA said.

“Since the introduction of the pension freedoms, the retirement income market has changed substantially,” said Christopher Woolard, the FCA’s executive director of strategy and competition.

“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future.”

While 52 percent of fully withdrawn pots were reinvested somewhere else, savers may be paying too much tax, missing out on investment growth and other benefits, it said.

Those who withdraw money early without taking advice typically followed the ‘path of least resistance’ and stuck with their current pension provider for a drawdown product without shopping around, it added.

With some large pension providers pulling out of the annuity market, there was a risk of reduced competition over time, and product innovation was currently limited.

As a result, the FCA said it would look at whether extra protections were needed for consumers who buy drawdown products without advice, whether consumers were paying too-high charges and if they ended up with unsuitable investment strategies.

It would also look to improve competition in the non-advised drawdown market by asking the government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot.

Consumers may also need better tools and services to help them better understand their options after the pension freedoms and improve trust in pensions, it said.