The review found that:
Accessing pension pots early has become ‘the new norm’. Almost three quarters (72%) of pots that have been accessed are by consumers under 65. Most are choosing to take lump sums rather than a regular income.
Over half (53%) of pots accessed have been fully withdrawn. However the fully withdrawn pots are mostly small with 90% below £30,000, and 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension.
Drawdown has become much more popular. Twice as many pots are moving into drawdown than annuities.
Although it is still early days for the market, the review identified five issues:
Over half (52%) of fully withdrawn pots were not spent but were moved into other savings or investments. Some of this is due to a lack of public trust in pensions. This can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits.
Consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around.
Consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5% of drawdown was bought without advice compared to 30% now. Drawdown is complex and these consumers may need more support and protection.
Providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition over time.
Product innovation has been limited to date, particularly for the mass market.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said: “Since the introduction of the pension freedoms, the retirement income market has changed substantially. This study looks at what has happened during this time, and gives us an early view of areas to keep a close eye on.
“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. Ensuring this market works well will require cooperation across Government, regulators, the industry and consumer bodies.
“We will work closely with stakeholders to make sure we are clear on the actions we are best placed to lead.”
The FCA has identified a range of possible measures to address some of the emerging issues including:
gathering further evidence on consumer outcomes to assess whether additional protections should be put in place for consumers who buy drawdown without advice. We will gather evidence on whether consumers pay high charges and have ended up with unsuitable investment strategies.
improving competition in non-advised drawdown by:
asking Government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot.
proposals to make it easier to compare and shop around for drawdown
tools and services to help consumers understand their options after the pension freedoms and improve trust in pensions, primarily by building on existing initiatives such as the free guidance provided by Pension Wise.
The FCA is inviting feedback on the initial findings and recommendations, and aims to publish a final report in the first half of 2018.
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