‘Wake up packs’ as customers approach retirement, and ‘investment pathways’ for those accessing their retirement savings are amongst the proposals announced by the Financial Conduct Authority (FCA) as it seeks to improve outcomes for customers in the retirement income market.
Under the plans, which are now subject to formal consultation, pension providers will need to send a ‘wake up’ pack to each customer when they reach their 50th birthday. A second such pack should be sent on their 55th birthday, and the packs should continue to be sent every five years until such time as the individual has fully accessed their retirement savings.
The packs should include a one-page summary document, which will provide the following information:
· The individual’s contribution rate
· The fund value
· Whether guarantees or other special features apply to the plan
· A statement asking the individual to consider whether they are saving enough
· A statement about the availability of pensions guidance
A series of relevant risk warnings will also be included in the wake up pack, and providers will not be permitted to send any marketing material alongside the pack.
At the point that an individual seeks to enter a drawdown arrangement, providers must provide them with three ‘investment pathways’ that they could use. The customer is not obliged to follow any of these pathways, but the provider must set out simple investment solutions that they could use for each of the following options:
· Accessing the entire pension pot over a short period
· Using the pot to provide a regular retirement income
· Keeping the money invested, and maybe accessing it occasionally over time
The FCA has taken action in this respect after its Retirement Outcomes Review – published at the same time as the proposed new rules for providers – showed that 33% of non-advised drawdown customers had their entire holding in cash, and that they could be earning as much as 37% more if they instead invested in a range of assets. Under the new proposals, no customer should end up invested in cash unless they make an active decision to do so.
Although fewer retirees now choose to access their pension pot via an annuity, the regulator is also proposing new consumer protections in this area. Providers will need to ask customers a series of questions about their health and lifestyle, to ascertain whether they are eligible for an enhanced annuity. Firms will also need to provide customers with information regarding the best annuity quote available in the open market.
The Government introduced pension freedoms in 2015, giving people much more flexibility as to how they accessed their retirement savings. However, this gave rise to concerns that some people were making complex choices, such as entering drawdown, without fully understanding the choice they were making, and it is this that the Retirement Outcomes Review aims to address. The Review notes that 32% of those entering drawdown now do so without seeking professional financial advice, and that 94% of these non-advised drawdown customers accept the drawdown offering of their pension provider and do not shop around.