FCA may cap charges on drawdown pensions
LONDON (Reuters) - Britain’s markets watchdog said it might cap charges on drawdown of pension savings if pension providers are not giving customers value for money.
People have been able to cash in their pension pots since the UK pensions market was opened up in 2015. But a review by the Financial Conduct Authority found that people were not always getting the best deal and that there was a lack of transparency on charges.
“The FCA found that, while consumers have welcomed the freedoms, some are at risk of harm,” the regulator said on Thursday.
The regulator singled out the treatment of consumers who do not take advice when drawing down pension money, or taking cash out of a pot and reinvesting it to obtain a regular retirement income.
Between April 2015, when the new freedoms were introduced, and September 2017, over 1.5 million direct contribution pension pots were accessed, with most pots below 30,000 pounds ($39,261.00).
More thank half of the fully withdrawn pension pots were not spent but transferred into other savings investments, often for drawdown.
This does not always provide value for money as people typically use their existing provider rather than shop around, the FCA said.
“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 said.
Some products had pricing structures with up to 44 different charges, and one in three drawdown consumers did not know where their money was being invested.
Providers were “defaulting” customers into cash or cash-like assets when income would be 37 percent higher over 20 years if the money was invested in a mix of assets, the FCA said.
“In many cases, keeping money in a pension would have resulted in better returns, on average, and in paying less tax,” the FCA said.
The watchdog proposed that pension providers send their customers a “wake up pack” from the age of 50 with a one page document spelling out the risks before tapping a pension pot.
It is also consulting on requiring pension providers to offer “investment pathways” comprising three “value for money” options on what to do with money taken out of a pension.
A charge of 0.75 percent should be used as a point of reference, and firms would have a year to show that the “pathways” are working.
“If firms fail to introduce investment pathways with appropriate charge levels, the FCA has not ruled out introducing a cap on drawdown charges.”
The FCA’s proposals will be put out for public consultation.