At the beginning of this year, the Financial Conduct Authority (FCA) announced new rules and plans to help make pension choices clearer for over-50s, which it said will help up to 100,000 every year. The new rules came into effect on 1st November.
In essence, consumers will be sent information from pension providers much earlier – from the age of 50 rather than just a few months before they retire – telling them about their pension options.
Since 2015, 'pension freedom' means that anyone over 55 can choose to draw out their entire money purchase pension as a lump sum if they so wish. Prior to that, pensioners could only take a quarter of the money as a lump sum, with most having the rest paid as an annuity, an amount paid out every year.
While this gives people more flexibility when accessing their pensions, it also means they can be left making complicated choices, and some could be left open to costly mistakes.
The FCA says it's "expressed concern" that some are withdrawing their private pensions but not properly investing them, meaning they're not getting enough out of their money to meet their needs.
It estimates that 100,000 consumers each year take a drawdown pension (an investment that pays you income) without getting any advice. It says the new measures will help stop these people losing out on pension income worth an estimated £25 million a year, and force providers to be more competitive.
So what exactly can we expect going forward from pension providers?
- Consumers will be sent "wake up packs" at age 50 and then every five years until they have cashed their entire pension. These will include a one-page summary document and a risk warning, along with reminders that consumers can get further guidance about their pensions.
- Firms must assess whether consumers are eligible for an "enhanced annuity" and give them a market-leading quote. Enhanced annuities give a higher level of annuity income for those with reduced life expectancy. Pension firms will need to ask their customers questions to check whether they're eligible, and give them a quote based on what level of income they want their annuity to provide, rather than how much the annuity costs.
- Firms should offer consumers "investment pathways" for their pensions. Under the proposed rule, consumers who choose the drawdown option without advice could choose one of four objectives for their pensions, and be offered an investment solution based on this.
- Consumers should be warned about keeping their pension savings in cash rather than investing. Pension firms would need to make sure that customers who hold their pensions in cash are actively choosing to do so, and have been told about the likely long-term impact on their incomes.
- Pension scheme providers should give consumers ongoing information about the charges they're paying. Consumers who are in the process of converting their pension cash into a retirement income would be given annual information about the costs and charges they've paid on their pension pots. This would be presented as a cash amount, in pounds and pence, to make it easy to understand how much has been paid.
Brunsdon Financial Chairman and Financial Adviser Brian Morman said, “Anything that helps people make clearer and more informed decisions about their pension choices can only be a good thing. And the earlier they are offered the information, the longer they have to make decisions before crunch time. But at the end of the day, however much printed information consumers receive about their pension options, nothing beats sitting down with a qualified financial adviser and having a focused conversation. That’s exactly what we provide at Brunsdon.”
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