The Financial Conduct Authority is to review the fast-growing do-it-yourself drawdown market, as the watchdog warned recent pension reforms had increased risks for older savers.
In its annual business plan published this week, the City regulator announced it would review providers that sell drawdown products to investors acting without the help of a financial adviser.
Sales of “unadvised” drawdown (where funds are left invested) have grown sharply since reforms in 2015 gave over-55s the freedom to spend their defined contribution pension pots as they wish.
Before the pension freedoms, nine out of 10 of the 400,000 or so retiring each year bought a secure income, or annuity, with their pension savings; only the wealthiest invested in drawdown, which was considered risky as funds are exposed to stock market volatility.
According to the most recent market data, however, about 55,000 drawdown policies were sold between July and September last year, compared with 25,000 annuities. About 600,000 consumers have around £80bn of assets invested in drawdown, according to FCA figures.
The FCA said “poor decision-making” when retirement income is taken may lead to consumers running out of funds, “particularly given the trend to enter drawdown without advice”.
“The government’s pension reforms have increased the complexity of the decisions consumers need to make at retirement,” it said in its business plan.
“Faced with an increasing range of options and a market undergoing continued change, making decisions about retirement income can be daunting and challenging for many consumers. Many still find it difficult to balance longevity and investment risks.”
The FCA said it would investigate whether drawdown firms were providing adequate information so customers “can make an informed decision”. It will review both the sales and communication processes of a sample of firms.
“We will also examine whether firms give their customers adequate post-sale information to enable them to continue to make decisions that support good outcomes,” it said.
The regulator also identified a number of risks affecting older savers, including the quality of advice around retirement income, difficulties in comparing products and services, and the potential for exclusion from the market from the expansion of digital services.
The FCA said that older savers were also at “increased risk” of pension scams, after the pension freedoms triggered the release of more than £9bn in pension cash since 2015.
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