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Today, the FCA published its final report on the Retirement Outcomes Review, which looks at how consumers have reacted to the pension freedoms introduced in April 2015. While the vast majority have welcomed the freedoms – which enable people to access their pension pots from the age of 55 – many may not necessarily be making the most of them.
The figures show that more than 1.5 million defined contribution pension pots were accessed between April 2015 and September 2017, with 72% of those who accessed their pots being less than 65 years old. This is exactly what many people were afraid of, and why the review felt warranted in the first place.
While it may be worrying that 55% of accessed pots had their funds fully withdrawn, 94% of those who withdrew their pension savings from one pot have other sources of income. Additionally, 88% of these pots have less than £30,000 in them, and 52% were transferred into other savings or investments rather than spent.
This is all well and good, as long as those who withdraw their funds carefully consider where they place it. Unfortunately, 32% of pots were accessed without advice – a substantial increase from 5% before the freedoms – which means that retirees could be putting their funds in savings accounts that pay just 0.05% interest, for instance, instead of picking a savings Best Buy or stocks & shares ISA.
Considering a person's future is on the line when it comes to their pension savings, it is worrying that many seem to be taking the path of least resistance with their main pension pot, according to the FCA, and simply entering drawdown with their existing provider. In fact, twice as many pots have been used for drawdown compared to buying an annuity, and one in three consumers who have gone into drawdown don't even know where their money is invested.
Drawdown is designed to allow people to continue enjoying returns on their pension pots while "drawing down" just what they need. The perfect drawdown product would even be able to allow a retiree to live on the interest generated by their pot alone. In contrast, an annuity offers a fixed income for life, which could provide more security but means a retiree would not be able to gain any additional funds later in life unless they were to choose equity release or generate new income.
Unfortunately, 33% of non-advised drawdown customers are only holding cash, which means there's not much chance for them to generate big returns – which in turn means they could end up running out of money – and the FCA found weak competitive pressures and low levels of switching, with many consumers ending up paying too much in charges as a result.
Considering that only 35% of consumers who'd sought out advice went with their pension provider's drawdown option compared to 94% who did not take advice, and the figures suggest consumers could increase the income from their pot by up to 37% by moving away from cash and by 13% simply by switching to a provider with lower charges, more clearly needs to be done to educate people about their retirement options.
While the FCA has suggested several remedies, including improving engagement and promoting competition, this may not help those currently facing the choice of what to do with their pension pots. While drawdown may be tempting, don't underestimate the safety of an annuity – why not talk to an expert to find out more?
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