This blog looks at what the FCA is planning to do to regulate the way unadvised drawdown plans are presented to customers. This follows the publication on a further policy paper from the FCA – CP 19/21
The point of the blog is to explain that the choice architecture discussed by the FCA can be talked about by non FCA regulated people – the employers with workplace pensions and the trustees of occupational pensions – including the multi-employer ones,
These people are often outside the FCA’s line of sight!
The FCA have made three simple changes to the proposals in their Retirement Outcomes Review – changes that are intended to help people who don’t take advice when drawing down from their pension pot (or pots)
The FCA plans to
- introduce ‘investment pathways’ for consumers entering drawdown without taking advice
- ensure that consumers entering drawdown only invest mainly in cash if they take an active decision to do so
- require firms to send annual information on all the costs and charges paid over the previous year to consumers who have accessed their pension
According to the FCA, around 30% of consumers who enter drawdown, do so unadvised.
It proposes that such people are given a range of investment pathways which might include continuing with the current investment strategy and drawing nothing, preparing to buy an annuity , or drawing the money from the pension pot into a bank account (drawdown). The investment pathways are collectively know by the FCA as “the choice architecture”.
The Retirement Outcomes Review found
- Many consumers, particularly when focused on taking their tax-free cash, take the ‘path of least resistance’ and enter drawdown with their existing provider.
- Around 1 in 3 consumers who had gone into drawdown recently were unaware of where their money was invested.
- Some providers were ‘defaulting’ consumers into cash or cash-like assets. Overall 33% of non-advised drawdown consumers were wholly holding cash.
- A consumer drawing down their pot over 20 years could increase their expected annual income by 37% by investing in a mix of assets rather than just cash.
- Evidence suggests drawdown providers could improve investment outcomes for consumers by offering more structured options and making the decision simpler to navigate.
- Charges for non-advised consumers vary considerably from 0.4% to 1.6% between providers. Average charges are higher than in accumulation, and can be complex and hard to compare.
Some simple thoughts
When I sit outside the FCA’s bubble and consider things as an employer and on behalf of trustees, I am asking myself the following questions.
What is wrong with non-advised drawdown?
The problems with non-advised drawdown are listed – but not everyone who chooses non-advised drawdown does so as “the line of least resistance”, for many people it can be a smart decision. I’ll explain why..
The paper was published on the same day as the pile-driver of a report into adviser behaviour over transfers (CP19/25).
The costs of advised drawdown established in CP19/25 are considerably higher than the 0.4- 1.6% quoted here
Total ongoing advice charges of 0.5% to 1% will reduce an average transferred pension pot of £350,000 by £145 to £290 each month in the period immediately after transferring. Similarly, ongoing product charges of 1% to 1.5% will reduce it by a further £290 to £440 each month. So the total deductions on a transfer value of £350,000 would range from £435 to £730 each month. A DB scheme with that size of transfer value might have a current income value of £1,000-£1,200 each month, so the charges represent between 44% and 61% of the current level of that value.
It would seem from the FCA figures that not only is the cost of non-advised drawdown cheaper because it doesn’t include adviser charges but because the cost of the drawdown product itself are cheaper 0,4% – 1.5% pa for unadvised and 1% to 1.5% for advised.
While the pensions industry gasps at the stupidity of people DIY’ing their drawdown , I suspect there are many in the FCA who see such people as quite smart. They are at least doing something to combat the 44-61% income cut – occasioned by entering into advised drawdown.
I don’t think there is anything wrong with DIY if it can substantially increase your retirement income. For some people unadvised drawdown is more than the line of least resistance – it is an active choice which is right for them.
What is wrong with talking with an annuity broker?
Annuities provide a certainty that drawdown don’t – and they provide a genuine insurance against you living too long.
If you go to an IFA, you are unlikely to get much help buying an annuity.
There are obviously the risk adverse and very cautious people, who would still prefer and should be recommended pension annuities. They usually benefit more from a specialised service than going through an advised process with an IFA. /2
— Eugen Neagu (@BespokeFS) July 28, 2019
As Eugen says, IFAs are not set up to broke annuities, if you are looking at your retirement options in retirement in a holistic way, you are going to have to shop around and find yourself an annuity broker.
If you rely on the line of least resistance and buy the first annuity that comes your way (one from your provider) you may end up like the people who are currently seeking redress from Standard Life. Annuity shoppers need to shop around.
In my work for AgeWage, I have done research on annuity brokers and recommend you talk with Retirement Line
Could something better come along?
If we get a Pensions Bill this year, then it will contain the legislation to enact CDC for Royal Mail and an open door for other types of CDC – including decumulation only CDC which would allow you to swap your pension pot for a scheme pension.
This could provide a halfway house between an annuity and a drawdown policy with more income than the annuity and more certainty than drawdown. If you were to look at that glass half empty, you might say “less security than an annuity and less income than from drawdown” and I’d expect CDC to fit into the choices people have in future years as a further option (not a default).
I’m also asking….Is my choice architecture broken?
What the paper doesn’t cover is who is delivering the choices (other than the provider of the pension pot). In the wide-world, many of the people approached for help on these choices are employers who are generally told they should not offer advice but should refer people to Pensions Wise or tell them to see a financial adviser. I know and like Pensions Wise but many people who go to Pensions Wise just go back to their boss with a statement like “they told me to seek regulated advice from an independent financial adviser, which doesn’t get the monkey off the employer’s back.
I am coming to the conclusion that the stock phrase “you should seek regulated advice from an independent financial adviser” is of limited value. It’s fine for the top 10% of people who have the money to pay for advice and the need for a very sophisticated approach.
But I don’t think that seeing a regulated financial adviser tells you the whole story. An IFA may give you a long income and expenditure questionnaire to fill out to help him do his cashflow modelling, he may give you a huge underwriting questionnaire that he can send to an annuity broker, but he is unlikely to talk to you about the advantages of either unadvised drawdown or of buying an annuity or of holding on till something better comes along.
If you are going to an IFA for help with your retirement choices, you will be offered advised drawdown as your default option and you will find it hard to get advice on much else. Even if you go and pay your adviser to get all the choices, you may not get them. IFA’s aren’t always providing the full choice architecture that people actually need,
I think people need to have a different type of choice architecture that lists what is around now – advised drawdown, non-advised drawdown- but also what may be round the corner – CDC and the options that may emerge by waiting to take decisions.
After all, while the cost of delay to starting saving is obvious enough, the cost of delaying your starting spending your pension savings is a lot less clear.
We’re discussing all this at a series of workshops over August
If you are in charge of helping members of an occupational pension scheme or your staff in a group personal pensions with these tough choices at retirement, you might like to come to one of our four seminars in WeWork More Place on 13th, 14th , 28th and 29th August. Places are limited so if you are a consultant or adviser, we may not be able to fit you in, but please apply anyway and we can have a chat.
Along with AgeWage, you’ll get to hear about Choice Architecture from Quietroom and about Annuity Broking from Retirement Line. The sessions are 90 minutes long and we’re calling them workshops because we want all the participants to do some hard work establishing how they can adapt the choices they offer their staff to the changing world created by pension freedoms.
We will of course be talking about unadvised drawdown as part of this , by which time I expect to have had some deeper thoughts on CP19/21
If you are interested in the choices offered by employers and trustees, you can sign up for our seminars via this link
Sign up to AgeWage’s summer workshops
As Eugen says, IFAs are not set up to broke annuities.
This is a fatuous statement of half truth. The genuine IFA community that dealt with ordinary people comprising 95% of the adult working population have almost disappeared. They have not been replaced because they are over regulated. If an IFA were to advise an annuity, as I did for myself, they would be criticized by unqualified journalists and by regulatory authorities seeking the next reason why they should stay employed, and compensation awarded.
The real problem, as you have pointed out on several occasions, is sequential poor legislation that gives freedom and responsibility to those simply ill equipped to use it; in order to satisfy the desires of the 1-5% who, having used pensions as a means of funding for their retirement, find the constraints of the pension regime to be an impediment. Pension freedom legislation and its architects are an insult to retirement planning. And now we have the specter of using pension fund money for the deposit on a house. Is there no end to the madness?
Guarantees, such as those provided by an annuity, are almost non existent. Why? Because those that create the sequential disaster legislation fail to understand the one unifying factor in pension provision, the potential pensioner, the saver.
Sod the rich and pension freedoms, legislate for those that need the constraints and , dare I say, Guarantees, of a savings environment that uses consistency rather than risk as its bellwether. It is the ‘bookies’, the ‘risk’ advisers, that are setting the trends.
It is true that a significant proportion of IFAs have moved to higher ground; of necessity – to survive. regulatory and insurance costs which are too high to serve the general population. Legislation is so complex and open to change that only journalists (unregulated) are deemed to understand it.
At least Gordon Brown, for all his faults (which were many) reversed the stupid introduction of the facility to place residential property into personal pensions. Pension Freedoms should go the same way and all financial commentators should be qualified to do so.
I can dream : can’t I?
of course you can dream- Eugen is one of the IFAs seeking space on the higher ground and I applaud him for his honesty. The truth is as you put it – there is insufficient support for the ordinary saver which is the FAMR issue. Until the FCA makes it possible for ordinary people to see their choices in a sensible way, they will continue to default into nonsense like cash drawdown. I think the FCA doing the right thing with this paper but we need to be asking where people are getting the ir direction. With only 10% of us going to Pensions Wise I suspect most of us are trying to find our own way home with a torch!
would love to join you Henry if the location were a bit closer