LONDON (Reuters) – Britain’s markets watchdog mentioned it’d cap costs on drawdown of pension financial savings if pension suppliers don’t give clients higher worth for cash.
People have been capable of money of their pension pots for the reason that UK pensions market was opened up in 2015. But a evaluation by the Financial Conduct Authority found that folks weren’t at all times getting the perfect deal and that there was a scarcity of transparency on costs.
“The FCA found that, while consumers have welcomed the freedoms, some are at risk of harm,” the regulator mentioned on Thursday.
The regulator singled out the treatment of shoppers who don’t take recommendation when drawing down pension cash, or taking money out of a pot and reinvesting it to acquire an everyday retirement earnings.
Between April 2015, when the brand new freedoms have been launched, and September 2017, over 1.5 million direct contribution pension pots have been accessed, with most pots under 30,000 kilos.
More than half of the totally withdrawn pension pots weren’t spent however transferred into different financial savings investments, usually for drawdown.
This doesn’t at all times present worth for cash as folks usually use their present supplier moderately than store round, the FCA mentioned.
“The FCA found that charges vary considerably from 0.4 percent to 1.6 percent between providers and can often be complex, opaque and hard to compare,” it mentioned.
Charges must also be expressed in easy kilos and pence for the yr.
The Association of British Insurers mentioned it agreed less complicated presentation of costs was wanted to assist clients store round.
The FCA mentioned some merchandise had pricing buildings with as much as 44 completely different costs, and one in three drawdown shoppers didn’t know the place their cash was being invested.
Providers have been “defaulting” clients into money or cash-like property when earnings can be 37 p.c increased over 20 years if the cash was invested in a mixture of property, the FCA mentioned.
“In many cases, keeping money in a pension would have resulted in better returns, on average, and in paying less tax,” the FCA mentioned.
The watchdog proposed that pension suppliers ship their clients a “wake up pack” from the age of 50 with a one-page doc spelling out the dangers earlier than tapping a pension pot.
It can be consulting on requiring pension suppliers to supply “investment pathways” comprising three “value for money” choices on what to do with cash taken out of a pension.
A cost of zero.75 p.c needs to be used as a degree of reference, and companies would have a yr to point out that the “pathways” have been working, in any other case a cap was “highly likely”.
“If firms fail to introduce investment pathways with appropriate charge levels, the FCA has not ruled out introducing a cap on drawdown charges.”
Ian Browne, pensions knowledgeable at Old Mutual Wealth, mentioned a cap would hinder innovation and even high quality.
“It makes more sense to define what effective investment pathways look like for people and then consider how to make them as cost-effective as possible,” Browne mentioned.
The FCA’s proposals shall be put out for public session.
Reporting by Huw Jones; modifying by Jane Merriman and Gareth Jones