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UK regulator raises concerns over post-freedoms market

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The Financial Conduct Authority has expressed some concerns about the transition from membership of a defined contribution (DC) scheme to retirement following the introduction of pension freedoms in 2015.

Publishing its interim report on a review of how the retirement income market has changed since then, it said it had identified “emerging issues”.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future.”

The regulator said it was considering investigating whether additional protections were needed for consumers buying drawdown with advice, for example by gathering evidence on whether consumers paid high charges or ended up with unsuitable investment strategies.

The regulator said it might also ask the government to consider measures to improve competition in non-advised drawdown, and proposed developing tools and services to help consumers understand their retirement options and improve trust in pensions.

The regulator found that consumers accessing defined contribution pension pots early had become “the new norm”, with most opting for lump sumps rather than regular income.

Over half of pots accessed have been fully withdrawn, but of these, over half (52%) were moved into other savings and investment products, partly due to a lack of trust in pensions.

It noted that this could result in bad outcomes for consumers, as they could pay too much tax, miss out on investment growth or lose out on other benefits.

The regulator also found that most consumers accessing their pots early did not shop around for drawdown products from companies besides their existing provider. In addition, many consumers bought drawdown without advice but might need further protection to manage it effectively.

According to the FCA, the share of consumers taking out drawdown pensions without taking advice grew from 5% before the introduction of pension freedoms to 30%.

The regulator was also worried that annuity providers leaving the open annuity market could weaken competition over time.

It also said product innovation had been limited so far, especially for the mass market.

Review ‘disturbing’

The UK pensions trade body said the regulator’s review made for “disturbing reading”.

“Without timely action now, those retiring in the near future who are dependent on defined contribution pots and who have no access to advice will not receive the retirement they hope for,” said Tim Gosling, policy lead for DC at the Pensions and Lifetime Savings Association.

The default retirement option should lead towards an income product rather than cash, which could mean a form of “soft” default, he said.

Gosling also called for “a new generation of high-quality retirement income products”.

“These need to have strong independent governance and be suitable for those needing an income but who do not have access to advice,” he said.

The FCA’s report can be found here.

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