These include requiring providers to offer a default fund or ‘standardised investment solution’ to customers taking out a non-workplace pension without advice and to issue cash warnings to all customers holding more than 25% of their fund in cash for 6 months or more.
• Cash warnings important but need to be balanced
• Question over how to warn about inflation if, as OBR predicts, it is negative in some future years
Steven Cameron, Pensions Director at Aegon, comments: “In current times of record high inflation, holding cash over any longer time-period will lead to a loss of value in real terms. We support the new requirements for firms to send additional communications to customers who have more than 25% of their funds in cash for 6 months or more. However, these need to be balanced with an explanation of when cash holdings may serve a purpose and also that investing isn’t risk free. They also need to be responsive to future patterns in cash saving interest rates and inflation.
“The rules will require firms to provide generic illustrations of how much a £10,000 investment will lose in value over 10 years. The rules require this to be based on a 0% interest and on the ruling rate of Consumer Price Inflation. With the Office for Budget Responsibility predicting a sharp fall in inflation in coming years, basing a 10 year projection on current historic highs could be very misleading. Similarly, using a 0% interest rate when cash savings rates have risen and are expected to continue to do so again seems overly pessimistic. Furthermore, the OBR expects inflation to be negative in some future years, which would mean even with 0% interest, cash savings would grow in real value. This raises major questions over what a warning about the ‘dangers’ of inflation for cash savers would look like then.
“The FCA has left it for each firm to decide if based on market conditions they believe it is ‘the wrong time’ to issue a cash warning. This will be very challenging at a time when few can predict where markets will move next. Deferring a communication for 3 months might benefit some customers if they then didn’t move out of cash before a market fall. But if markets actually rose, deferring investing could mean some customers lose out, leaving providers open to being judged with the benefit of hindsight.”
Andrew Tully, technical director, Canada Life comments: “It’s a positive move that the regulator has listened to warnings and recognised that lifestyling will not be appropriate for all investors. Most lifestyle strategies are designed with wholly buying an annuity at a specific age and that is not what most retirees are doing and won’t be the best outcome for many, so we shouldn’t be requiring defaults to be designed in this way.
“People need advice, failing that to be led down a path suitable to their individual needs, taking into account many will phase into retirement, use drawdown, or withdraw funds as lump sums. As savers circumstances change, so their retirement choices and investment decisions should change and adapt. Saving for retirement and decisions around generating income in retirement is never a perfect linear choice that can be chosen many years before retirement and left alone.
“Everyone is an individual and my belief is only through seeking regulated financial advice can most savers be confident in making the right ongoing decisions around investing and tax, navigating the rules as you continue through your retirement journey.”
FCA Requirements
|
