Research shows UK consumers are increasingly accessing pension drawdown – a way of taking money out of your pension to live on in retirement – without taking advice.
The Financial Conduct Authority (FCA) says people who access their pension pots flexibly may need extra protection to manage withdrawals effectively.
This is after it emerged the number of people going without financial advice has risen dramatically. Figures published in the regulator’s July 2017 Retirement Outcomes Review interim report show the proportion of people who forgo advice and take a “DIY” approach to managing their pension pot in retirement has risen from 5% to 30% following the introduction of pension freedoms legislation in 2015.
Prior to April of that year, savers were faced with restrictions on when and how they could access their pension pots. Consequently, more than 90% of pots were used to buy annuities. Today, as a result of the new freedoms, twice as many pots are moving into drawdown than are being used to purchase annuities. But concerns are growing for those who choose to draw on their pension savings without taking advice.
Drawdown demands a different mindset to that needed by those who retire with an annuity, as it requires people to plan their own investment strategy and make sure withdrawals are sustainable.
Many people, however, are not well-placed to make investment decisions at retirement and are often daunted by the array of choices on offer. The FCA is particularly concerned that savers could end up following an investment strategy that is at odds with their risk tolerance and plans for the future. They could take on excessive levels of investment risk or, conversely, miss out on investment growth where they have invested in overly cautious assets.
The regulator found that people who access their pots without taking advice typically follow the “path of least resistance” and choose the drawdown plan offered by their current pension provider without shopping around.
The FCA’s research highlights the challenge that lies ahead for thousands of savers who have yet to start taking benefits from their pensions. It also emphasises the need for government to review the guidance and information available to people before they access their pension pots – and when they actually dip in.
People may need a retirement investment strategy that can last for 30 years or more. A financial adviser will recommend an investment strategy that is right for you.
