37% of drawdown consumers could get more income by investing in mixed assets

The FCA has recently estimated that 37 per cent of consumers could receive more retirement income from their pot every year by investing in a mix of assets rather than cash, despite consumers welcoming the pension freedoms, in its consultation that accompanied the final report of the Retirement Outcomes Review.

The FCA launched the consultation on a package of measures with the ambition of protecting consumers, improve engagement and promote competition in the retirement income market. The regulator has said that defined contribution pots will grow “significantly” in the coming years, so it is vital to put this market on a good footing and keep it under review.

The firm has said that the measures will help consumers at key points when they make decisions about what to do with the pension pot, while also providing ongoing support to consumers once they have accessed their pension savings. For example, one of the measurements includes improvements to the clarity and timings of communications prior to consumers making a decision and simplifying the options available and the ongoing communication.

Commenting on the consultation, FCA executive director of strategy and competition Christopher Woolard said: “We know that the choices introduced by the pension freedoms have been popular with many consumers. However, they’re now required to make more complicated decisions than ever before. Many people need more support when making choices. The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand.

“This is an important market that is still relatively new and is continuing to evolve. This is not the end of the work we are doing and we will continue to keep the market under review as it develops.”

Furthermore, the FCA has proposed sending ‘wake-up’ packs to consumers from the age of 50, and then every five years until they have fully accessed their pension pot. The packs would include a single page summary, known as a ‘pensions passport’, and firms will also have to include specific retirement risk warnings at the same time as the new packs.

The new communications have been designed to address the lack of consumer engagement and to encourage consumers to engage with the risks and choices they face and prompt then to access the support and guidance they need.

The regulator has also stated that it is inviting views on the introduction of investment pathways for customers at the point of entering drawdown, believing that a more structured set of options would help consumers engage with the decisions that they are making, consider their retirement objectives and end up with a more appropriate investment solution.

In its report, the FCA revealed that 60 per cent of consumers that are not taking advice on drawdown were not sure or only had a broad idea of where their money was invested. A third of consumers were wholly invested in cash, with around half of these likely to be losing out on income in retirement.

However, the FCA wants drawdown options to be “good value for money”. In order to allow consumers to compare costs and drive good value for money. The regulator is proposing that firms include a one-year charge figure in pounds and pence in the key features illustration that is provided to consumers. The authority found that charges vary considerably from 0.4 per cent to 1.6 per cent between providers and can often be complex, opaque and difficult to compare.

If firms fail to implement investment pathways with appropriate charge levels, the FCA has said that is has not ruled out introducing a cap on drawdown charges.

In relation to the measure designed to help consumers after accessing their pot, the FCA has proposed that all consumers should receive information from their provider annually, regardless of whether they are currently drawing an income from their pot, including the actual charges paid.

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