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Pension passports and clearer charges proposed by the FCA

Regulator announces plans to help people make better pension choices

A report unveiled today has called for people to be provided more information about their pensions from the age of 50, so called ‘wake-up packs’ or ‘pension passports’, and clearer charges if they choose pension drawdown.

However, there was no commitment to introduce a charge cap on pension drawdown products.

The proposals came as the Financial Conduct Authority (FCA) published its conclusions to the Retirement Outcomes Review.

Over the last two years, the review has looked at any potential problems caused for retirement savers in the wake of the seismic 2015 pension changes.

The so-called ‘pension freedoms’ have allowed those coming up to retirement greater flexibility in how they access their pension funds, but this has brought some dangers.


Pension passports and comparison tools

A main proposal in the review is that ‘wake-up packs’ should be sent to customers from the age of 50 and then every five years until the customer has fully accessed their pension pot.

The packs should include ‘a one-page ‘headline’ document, in clear and accessible language’ – known as a ‘pension passport’ –  to will give savers an idea of their current pension position.

Comparing pension drawdown charges is extremely difficult and the FCA indicated that it is working with the Money Advice Service (MAS) and the Association of British Insurers (ABI) to develop a drawdown comparison tool.

To introduce greater transparency on charges, the regulator is also proposing that firms include a one-year charge in pounds and pence in the key features illustration they provide to consumers.

No immediate charge cap on pension drawdown

There were no immediate plans announced to apply a cap on charges levied on pension drawdown plans.

This is despite the review finding that pension drawdown charges vary from 0.4% to 1.6% between providers and can ‘often be complex, opaque and hard to compare’.

Our research in April 2018 on rip-off pension drawdown charges found a similar story.

There was, however, some scope for a future cap to be introduced, with the regulator commenting: ‘If firms fail to introduce investment pathways with appropriate charge levels, the FCA has not ruled out introducing a cap on drawdown charges.’

Investment pathways proposed

The report found that too many people are holding their money in cash in drawdown and that 60% of consumers went into drawdown without taking financial advice. A similar proportion of savers are unsure exactly where their money is invested.

The proposed remedy is ‘investment pathways’, described as ‘ready-made investment solutions’ by the FCA, that can help people make investment choices when they retire.

This would come in the form of a structured set of options to help people engage with important retirement-related decisions. The ‘pathways’ would help them avoid the underperformance risk of staying in cash.”

Which? Money managing director Jenni Allen said: ‘The proposal to introduce investment pathways will go a long way to support disengaged savers and help them make smart retirement income choices.

‘However, it is disappointing that the FCA has stopped short of calling for a charge cap on pension drawdown products, that could stop consumers from sleepwalking into costly and confusing products that can drain the money they need for their retirement.

‘The FCA must now act swiftly on its proposals to ensure they are introduced as quickly as possible.

What is the Retirement Outcomes Review?

The review by the FCA was launched in July 2016 to assess how the retirement income market has evolved since the pension freedoms were introduced in April 2015.

Since April 2015, consumers have much more choice in how they can use and access savings in their defined contribution pension pots.

A primary focus of the review was to gauge how competition has developed after the pension freedoms, with particular emphasis on outcomes for consumers who do not take regulated financial advice.

The interim report, published in July 2017, had previously flagged that while there had been few signs of reckless behaviour by retirees, there were issues building up that may warrant FCA intervention.

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