New pension drawdown rules
Many people access their pension without taking financial advice. The Financial Conduct Authority (FCA) found that many consumers end up in investments that may not be right for them. In addition, 60% of people not taking advice were either not sure or only had a broad idea of where their money was invested. This is why the FCA is introducing new pension drawdown rules to help protect the consumer when accessing their pension without financial advice. Here’s how it could affect you.
In April 2015 Pension Freedoms were introduced, giving people more autonomy about how to access their pension. Since the pension freedoms, there has been a substantial shift away from annuities, and more consumers are choosing to take drawdown without advice. Twice as many pots have been used for drawdown than to buy an annuity. A third (32%) of these were accessed without advice, compared to 5% before the freedoms.
For a lot of people, retirement income choices start with a decision to access tax-free cash rather than other questions. At that point, consumers face a range of complex decisions such as which provider to use, where to invest their remaining pot, and how quickly to drawdown. People also need consider how long they expect to live. The FCA has found that many consumers who do not take financial advice struggle with these decisions, and many end up in investments that may not be right for them, including in cash.
The FCA research found that 33% of non-advised drawdown consumers are wholly holding cash, with over half of these consumers likely to be losing out on income in retirement by doing so.
The FCA states that someone who wants to drawdown their pot over 20 years could potentially increase their expected annual income by 37% by investing in a mix of assets rather than just cash.
So what is the FCA doing to help?
The FCA is introducing several new rules to help protect consumers. The first thing to be introduced will be ‘wake up’ packs, which will start to be issued to relevant consumers from November 2019. This will then be following by further regulatory changes in 2020.
What is a ‘wake up pack’?
A ‘wake‑up’ pack is intended to give consumers timely, relevant and adequate information about their retirement options to enable them to make an informed decision.
It is a prompt for consumers to start considering their retirement plans and how their pension might form part of those plans. So that they can begin making preparations in good time before retirement.
The new FCA rules will require ‘wake up packs’ to be issued by pension providers at timely intervals from a person’s fiftieth year. This timing is to reflect the fact that people can access the pension guidance that is provided by Pension Wise from age fifty.
Consumers will receive a summary sheet with relevant information alongside a money advice factsheet. The FCA have prevented providers from including any marketing material with the ‘wake-up packs’.
New drawdown rules
The FCA will introduce other regulation changes during 2020. The first changes being implemented in April 2020 and the second stage implemented in August 2020.
Drawdown is when you choose to re-invest your pension pot at retirement but can make withdrawals at any time.
The FCA will require pension providers to offer consumers four investment pathways to help them make decisions about their pension pot:
- Option 1: I have no plans to touch my money in the next five years
- Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next five years
- Option 3: I plan to start taking my money as a long-term income within the next five years
- Option 4: I plan to take out all my money within the next five years
The FCA hopes that these new guidelines will help to prevent consumers who do not take financial advice from making unsuitable investment choices.
Why financial advice could make all the difference
The new regulations look to support consumers who do not seek independent financial advice when taking their pension pot. While you may not be required to seek advice, depending on what you wish to do with your pension pot, there can potentially be life-changing benefits in doing so.
Retirement planning can be complicated and challenging for someone with no financial background to navigate. Pension products are not all the same and rules differ between schemes. Coupled with this, many people do not know where all their pensions are or have forgotten about past investments that could be crucial to their financial security.
It’s not just your pension pot that should form part of your retirement plan, other assets and factors should be looked at in conjunction with any pension provision you may have.
Many people have misunderstood how a pension works, the terms and conditions of other investments, how tax is applied, and what happens to your money if you die before and after retirement. This means that people are potentially making life-changing decisions based on assumptions that may be incorrect.
Working with a Life Centred Financial Planner, not only provides you with the peace of mind financial advice offers, but the benefits you receive are so much more.
A Life Centred Financial Planner takes time to get to know you, what your values are, and how you got to where you are now. We take time to understand why you have been saving your money, what your plans and dreams are for the rest of your life. This is because we believe that until we understand you, we have no right to tell you what to do with your money.
Our Life Centred Financial Planners use cash flow modelling to help you see how all your assets can work together to support your life goals and retirement aspirations. We build in cost of living increases, inflation and things such as potential care costs or other later life expenses that could occur.
It makes it easy to see any financial vulnerabilities and helps to give you peace of mind that you will have enough money in retirement.
Our Life Centred Financial Planners work with you to locate all your pensions and investments and help you understand how they work so you can make informed decisions about your future. Creating a bespoke plan that is unique to your life.
Deciding what to do with your pension pot and how to utilise the financial resources you have to support your retirement are some of the most significant financial decisions you could make. If you are not a financial expert, then you may wish to seriously consider seeking independent financial advice from a Life Centred Financial Planner.
Why not get started today to ensure you can have the kind of retirement you are dreaming of. We offer a 30 minute complimentary consultation so you can chat through your concerns and find out how we can help you create a brighter future.
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