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FCA: More taking out drawdown pensions without advice

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More people are taking out so-called drawdown pensions without taking advice, the City regulator has warned.

The Financial Conduct Authority (FCA) said 30% of consumers go in to drawdown without getting guidance.

That compares with just 5% before the pension freedoms were introduced in April 2015.

It also says that those who access drawdown policies before the age of 65 typically stick with their current provider, rather than shopping around.

Drawdown pensions allow people to withdraw as much money as they like at any one time.

The FCA said twice as many consumers are now using drawdown rather than annuities, which provide a fixed income for life.

It is also worried that too many annuity providers are leaving the market, which it said could bring a risk of weakened competition.

Critics of the pension freedoms said new rules were vital.

“Many people will run down their precious pension pots too quickly or be scammed by bogus investment advisers,” said Professor David Blake, director of the Pensions Institute at Cass Business School.

“What would otherwise be a safe and secure retirement is going to end in tears for many of these people.”

‘Too much tax’

The FCA said that withdrawing money from pension pots had become “the new norm”.

However, the pensions industry has disputed that claim.

According to the Association of British Insurers (ABI), 100,000 people take money out of their pension pots every quarter.

But that is small compared to the 4.7 million people over the age of 55 who leave their pots untouched, the ABI said.

The FCA report said that 52% of fully-withdrawn pots were not spent, but were put into other savings or investments.

Some of this was due to “a lack of trust in pensions”, it said.

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Only a quarter of people withdrawing cash spent some or all of it.

“Contrary to the concerns expressed before the pension freedoms, we did not find that most consumers spent this money on consumer goods and services such as cars and holidays,” the report said.

Of those who took all the money out of their pension pots since 2015:

  • 32% put the money into Isa accounts or other savings plans
  • 25% spent some or all the cash – for example, on home improvements or a car
  • 20% invested the money elsewhere – in property, shares or other businesses
  • 14% used the money to pay off debts
  • 9% unknown

As a result some consumers may be paying too much tax, or missing out on investment growth, the FCA said.

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‘Cry for help’

The FCA is considering asking the government to:

  • allow consumers to access pension savings early, while continuing to pay full contributions into their existing pension plan
  • make it easier for people to compare – and shop around for – drawdown policies

Pensions expert Tom McPhail, from Hargreaves Lansdown, said he was concerned about the FCA’s plans to intervene in the market.

“This report looks like a regulatory cry for help; the FCA seems to be trying to put the pension freedom genie back in the bottle,” he said.

The TUC was also critical.

“Savers are increasingly dipping into their pots early. And others are following the path of least resistance and risk buying rip-off products,” said Frances O’Grady, the TUC’s general secretary.

The pension freedoms allow consumers to take out as much as they like from their pension pots after the age of 55, subject to income tax.

The regulator plans to publish its final report in the first half of 2018.

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