The Financial Conduct Authority (FCA) is to further examine the non-advised drawdown market amid concerns consumers are not making well-informed decisions on higher-risk products.
The regulator will examine income drawdown alongside other non-advised products, such as annuities, hybrid products, and cash withrawal options, in its new market study the Retirement Outcomes Review launched on 14 July.
It will not look at advised sales or access to advice, which is already being covered in work related to the Financial Advice Market Review.
The FCA said it wants to understand how consumers and providers are behaving following the government’s pension freedom reforms and what effect the reforms had on competition in the market.
The probe follows concerns over consumer protection as more and more people are found to be opting for higher-risk products on a non-advised basis.
The regulator had already said in late 2014 it was to probe the drawdown space after the industry raised concerns about a possible emerging trend of non-advised sales.
Pension freedom allowed all defined contribution savers unfettered access to their pension pots from age 55 – and for many consumers, this was the first time they had access to options other than annuities.
Sales figures collected by the regulator from providers in response to pre-reforms study the Retirement Income Market Study showed about a third of drawdown sales were non-advised between October and December.
By comparison, the market study had shown about 97% of drawdown was advised in 2013.
Its latest provider data again showed more than half of customers were staying with their existing pension provider when accessing their pension savings, with 53% of income drawdown and 57% of annuity sales made to existing customers.
The regulator also found “a significant number” of consumers were encashing their pots fully or withdrawing high rates.
It said: “In the Retirement Income Market Study we highlighted concerns regarding the ability of consumers to make informed decisions and place competitive pressure on firms in light of increased choice and complexity and increased mass market access to higher-risk products.
“The developments outlined above suggest that these concerns are being borne out in practice. The purpose of this review is to understand these developments in more detail and assess whether there are steps we can take to mitigate the associated risks.”
Little understanding
Provider Old Mutual Wealth welcomed the FCA’s probe of non-advised drawdown, saying the majority of people did not understand the retirement income option.
Its own research found 60% of people aged 50-75 who have never seen an adviser had little or no understanding of drawdown. This fell to 38% for those who had seen a financial adviser to plan their retirement.
Pensions technical expert Jon Greer said: “Non-advised drawdown is a relatively new phenomenon. Before the pension freedoms were introduced in April 2015 there was effectively no such thing, and a customer also needed to have £30,000 per annum secure retirement income from other sources before they could even consider the type of drawdown flexibility on offer today.
“As the rules have changed it is entirely right that the FCA is looking at how customers come to their decision to take their retirement income in this way.
“The new normal for retirement income is about choice and it is vitally important that customers understand their choices before they make them.”
The Retirement Outcomes Review will look at consumer shopping around and switching habits, non-advised consumer journeys, business models and barriers to entry and the impact of regulation on innovation in the market.
The FCA will also consult on rules to make annuity comparison tools compulsory after it found consumer switching rates improved from 13% to 40% when testing the tools.
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