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19 Jul 2017

Accessing pension pots early is ´new norm´

Withdrawing retirement savings early has become ‘the new norm´, and more than half of people who take their pension savings early withdraw the full amount, according to a major new study by the UK financial regulator.

The Financial Conduct Authority (FCA) launched the Retirement Outcomes Review in July 2016 to examine how the retirement income market is changing since the pension freedoms came into force in April 2015.

Interim findings suggest that savers may end up getting low returns after withdrawing their funds, and intervention in the market may be needed.

The FCA found that almost three quarters (72%) of pension savings “pots” that have been accessed are by consumers under the age of 65, and most are choosing to take lump sums rather than a regular income.

Over half (53%) of pots accessed have been fully withdrawn, although most of those are small (90% below £30,000) and 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension.

Of those pension pots that were fully withdrawn, 52% were not spent but were moved into other savings or investments. This is partly due to a lack of trust in pensions, the FCA explained, but it can result in consumers paying too much tax and missing out on investment growth and other benefits.

Meanwhile, income drawdown has become much more popular, with twice as many pension pots moving into drawdown rather than being put into annuities.

Consumers are increasingly accessing drawdown without taking advice. Before the pension freedoms, 5% of drawdown was bought without advice compared to 30% now. Drawdown is complex and these consumers may need more support and protection, the FCA said.

The review also revealed that providers are pulling out of the open annuity market, which could bring a risk of reduced competition over time.

Based on its findings, the regulator will look at whether additional protections should be put in place for consumers who buy drawdown without advice, whether the charges paid by consumers are too high, and if they end up with unsuitable investment strategies.

It will also ask the government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot, and to make it easier to compare and shop around for drawdown.

Consumers may also benefit from new tools and services to help them understand their options and improve trust in pensions, the regulator said.

Copyright © M2 Bespoke 2017

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