By Paul Moody, financial planning consultant, Armstrong Watson
From this month, new rules apply if you choose pension drawdown but do so without taking financial advice.
The COVID-19 pandemic has deferred many events of all sizes, from the Tokyo Olympics to millions of foreign holidays.
One of the less prominent delays has been a change to the Financial Conduct Authority (FCA) rules around pension drawdown.
In June 2018, the financial advice market regulator issued a consultation paper following a two-year review of the impact of the pension flexibility reforms introduced in 2015.
One aspect which particularly concerned the FCA was individuals who, having received various prompts to seek financial advice, decided to access their pensions through drawdown without doing so.
The regulator found:
- Many consumers were solely focused on taking their tax-free cash and were insufficiently engaged with the decision around how to invest the remaining funds that moved into drawdown.
- Around one in three consumers who had gone into drawdown since the introduction of pension freedoms were unaware of where their money was invested. Many others only had a broad idea.
- Some pension providers were “defaulting” consumers into cash or cash like assets when they moved into drawdown. As a result, one third of non-advised drawdown consumers are wholly holding cash.
The FCA concluded that its findings “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 FCA’s proposed solution to this was to mandate pension providers to provide a range of “investment pathways” for drawdown funds, for their remaining pension pot.
The regulator also proposed that there would be specific warnings issued to those who held more than 50 per cent of their drawdown fund in cash or cash-like investments.
The proposals were due to come into force in August 2020, but the implementation 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, the potential taxation and allowance impacts, and indeed the benefits and considerations of making such a decision, please take note of the FCA’s concerns and take financial advice – the investment pathways will be a help, but they are not an advised solution, tailored to your individual objectives and circumstances.
Understanding the principles of investing and the balance between risk and reward is really important.
All savings and investments, including pension funds, involve some degree of risk, but it’s vitally important to be in a position to make a fully informed decision.
A good financial adviser, as part of the advice provided, will carry out a detailed assessment of how much risk someone is prepared to take with their pension funds, and also establish someone’s tolerance for losses.
This will change at different points in time depending on your individual circumstances.
What sort of retirement am I aiming to achieve?
The Pensions and Lifetime Savings Association conducted research to develop the Retirement Living Standards.
The three different standards of living – minimum, moderate and comfortable www.retirementlivingstandards.org.uk – help us picture what kind of lifestyle we could have in retirement.
A single person will need about £10,200 a year to achieve the minimum living standard, £20,200 a year for moderate, and £33,000 a year for a comfortable lifestyle.
For couples it is £15,700, £29,100 and £47,500 respectively.
The current full basic state pension is only £9,100.
If you would like to discuss or review your situation, Armstrong Watson’s chartered independent financial advisers can help.
Please call Paul Moody on 01768 222030 or email paul.moody@armstrongwatson.co.uk
