The Financial Conduct Authority (FCA) has set out proposals for how to support millions of people in deciding how to access their pension savings in retirement.
More than 16 million people in the UK are saving for their retirement in a defined contribution scheme, the most common form of workplace pension. However, the regulator’s research shows that 75% of people over the age of 45 do not have a clear plan for how to draw on their savings.
Many aren’t even aware they have a choice to make once they access their pot – for example, whether to buy an annuity or opt for pension drawdown. This lack of financial literacy leaves many savers at risk of running out of money in retirement, particularly with the cost of a comfortable retirement having soared in recent years.
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The problem is that, although most savers need some form of tailored support, many can’t justify the costs associated with a professional financial adviser. This means they are forced to rely on free guidance, which is often too generic.
With this in mind, the FCA’s latest proposals include offering targeted support to savers to help them make more informed decisions when accessing their money.
The proposed reforms could require firms to pre-define a set of standard scenarios and categorise consumers into groups based on common characteristics. This would allow pension providers to establish “ready-made solutions” for customers based on their personal circumstances.
“If we get this right, consumers will be better supported in making financial decisions,” says Sarah Pritchard, executive director of consumers and competition at the FCA. “This will potentially lead to more people investing, which will help provide capital necessary to stimulate economic growth.”
What is the FCA’s “advice gap” review?
With millions of savers at risk of sleepwalking into retirement, the government announced plans in 2022 to review the boundary between “financial advice” and “financial guidance”. The Advice Guidance Boundary Review is being carried out by the FCA in conjunction with the Treasury.
In the UK, only authorised individuals who are registered with the FCA are allowed to give financial advice. These rules are in place to protect consumers, but they also mean that not everyone can access the support they need.
Hiring the services of a financial adviser can be expensive. As a result, those with modest investments often rely on guidance instead. This is free to access but not personalised to the individual.
While advisors can recommend a specific course of action, those offering guidance are only able to provide information and options to narrow down a consumer’s choices. Recommendations are not allowed.
Commenting on the FCA review, Pritchard said: “We want people to have access to the help, guidance and advice that they need, at a cost they can afford, when they need it, so that they can make informed decisions. So, we are reviewing the boundary between guidance and advice across investments.
“We know people find pensions particularly difficult to understand, so we are deliberately starting with this to help consumers with their pension decisions.”
Industry welcomes latest FCA pension proposals
The proposals outlined by the FCA this week have been welcomed by the industry on the whole, with one expert saying the consultation could have a “transformational effect on retirement decision making”.
“The ability for providers to offer support based on the experiences of different customer segments and a recommendation around a product type will give people added confidence at this important time,” says Anne Fairweather, head of government relations at Hargreaves Lansdown. “It can have a fundamental impact on their retirement income.”
Despite this, others have pointed out that firms should be taking some of these steps already. “Under Consumer Duty, pension providers should already be stepping up to offer targeted help in many circumstances. These aren’t just nice-to-haves – they’re essentials for delivering good retirement outcomes,” says Lisa Picardo, chief business officer at PensionBee.