More advice and better innovation is needed in the pension market, the regulator has warned.
The Financial Conduct Authority (FCA) has identified five key issues with the retirement income market that “may require intervention”.
In its first major review of the market since the pension freedoms were introduced, the regulator expressed concerns over the low number of people seeking advice before accessing their retirement funds as well as a lack of innovation from pension providers.
In this article we’ll look at each of the areas raised and explain what action the FCA may take to resolve them.
1. ‘Lack of trust’ in pensions
More than half (53%) of those who withdrew their full pots did not spend them (which is a good thing), with funds being moved into other savings or investments (which might not be). The regulator says this was partly because people “do not trust pensions”.
Now while some people might have very valid reasons for doing so, the fact that billions of pounds are being dumped into miserly cash accounts that fall well short of inflation means that money is losing its spending power.
Not only is the regulator concerned this can result in households missing out on investment growth, but it could also see them paying too much tax or losing out on other benefits.
So what does the regulator want changed?
Possible measures could include “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”.
Visit the loveMONEY investment centre to view your options
2. Not seeking out advice
[ADVERT]Another area of concern is that too few of us are taking advice when accessing our pension funds.
The regulator found that almost two thirds (63%) of annuity sales between October 2015 and September 2016 were unadvised.
And it’s particularly concerned by the rising number of people accessing drawdown without taking advice as this is a more complex product.
“Before the freedoms, 5% of drawdown was bought without advice compared to 30% now,” it says.
The regulator will now look into whether extra protections need to be put in place for those who don’t seek advice.
“We will gather evidence on whether consumers pay high charges and have ended up with unsuitable investment strategies”.
In the meantime, if you're thinking of accessing your funds, you can have a read of our guide to getting pension advice. It'll explain your options, what you can expect to pay and what you'll receive in return.
3. Not shopping around
Another bad habit we’re developing is simply accepting a product from our current pension provider without searching the market for a more suitable deal…
Saving for retirement? Visit the loveMONEY investment centre to view your options (capital at risk)
4. Lack of competition
…now that lack of shopping around is at least partly due to a lack of competition – especially in the annuity market.
“Providers are continuing to withdraw from the open annuity market, which could bring a risk of weakened competition over time,” the FCA notes.
It also wants to look at measures that would improve competition in non-advised drawdown.
The FCA said this could be achieved 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.
It will also look at whether it could be made it easier to compare and shop around for drawdown products.
5. Lack of innovation
Finally, the regulator expressed concerns that pension providers hadn’t come up with enough products to meet savers’ needs.
“We expect to see more product and technological innovation over the next few years as providers continue to develop their product propositions in response to the pension freedoms,” the regulator’s report notes.
However, it added: “It’s important that any innovative products developed by firms address genuine consumer needs and are appropriate for the target market.”
What are your thoughts on the issues raised by the regulator? Does any one in particular concern you? Let us know in the comments section below.