37 Per Cent Bigger Pension Income

Published / Last Updated on 27/06/2018

The Financial Conduct Authority (FCA) has today issued a consultation for proposed changes for information supplied to consumers drawing pension benefits, particularly flexible drawdown pensions, to improve consumer knowledge, to be more proactive and engaged with their pension as well as promoting competition and innovation in the retirement market.

The consultation has been issued alongside their 'Retirement Outcomes Review' publication.

The FCA suggests that some people are at risk of harm and estimates that some consumers in flexible drawdown schemes could receive up to 37% more in retirement income from their pension pot each year if they are invested in a market related funds such as stock, shares, property funds, government and corporate bonds.

They are worried that clients are literally leaving their pension fund in cash accounts subsequently devalued by a combination of low interest rates and inflation in addition to missing out on potential stock market growth.

The FCA suggests additional information should be supplied to consumers on a regular basis:

  • Clearer fund, performance and risk information both in the short and longer term
  • A positive 'opt in' for a consumer to invest in cash funds, by default they should be in market related funds
  • 'Wake up' packs for people at age 50 and then every 5 years until they 'retire' i.e. start taking pension benefits
  • Clarity on fees, charges and costs in real £ numbers rather than confusing percentages and jargon given that charges vary considerably from 0.4% to 1.6% pa between providers and can often be complex, opaque and hard to compare.
  • The FCA interestingly, did not rule out introducing a cap on drawdown charges

FCA research suggests that 60% of people did not know where their pension fund was invested and around a third (33%) were invested wholly in cash funds and at serious risk of capital erosion with inflation risk, low interest rates and missed potential growth.

Comment

The FCA's initiative is welcome.  Anything that can improve consumer knowledge and engagement with their pensions and savings must be a good thing.

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