New rules apply from February if you choose pension drawdown without taking advice.
The Covid-19 pandemic has postponed events of all sizes, from the Tokyo Olympics to millions of foreign holidays. A less well-known delay has been a change to the Financial Conduct Authority (FCA) rules on pension drawdown.
Back in June 2018, the FCA issued a consultation paper following a two-year review of the impact of the Pension flexibility reforms introduced in 2015. One area of particular concern was those pension owners who, having received several reminders to seek advice, decided to access their pensions through drawdown without taking advice.
The FCA found:
- Many individuals were solely focused on taking their tax-free cash and paid little or no attention to the investment of the remaining funds to be used for drawdown.
- Around one in three were unaware of where their drawdown money was invested. Many others only had a broad idea.
- Some pension providers were “defaulting” non-advised clients into cash or quasi-cash investments at drawdown. As a result, one third of the non-advised users of pension drawdown held their entire drawdown fund in cash.
The FCA concluded that its findings “strongly suggest that a significant number of non-advised consumers are likely to hold their funds in investments that will not meet their objectives for how they want to use that money in retirement”. The proposed solution was to mandate pension providers to provide a range of “investment pathways” for drawdown funds, based on the client’s objectives for their pension pot. The regulator also proposed that there would be specific warnings issued to those who held more than 50% of their drawdown fund in cash or cash-like investments.
The proposals were due to be implemented in August 2020, but the date was put back to February 2021. With cash returns virtually zero, the delay has potentially been costly for some non-advised pension owners.
If you are unclear where your drawdown funds are invested, take note of the FCA’s concerns. You may decide to take advice – the investment pathways will be a help, but they are not an advised solution, tailored to your circumstances.
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