Additional Protection for Flexible Pension Consumers

The government wants everyone approaching retirement to have access to some assistance to work out the options available and the consequences of their actions. Initially ‘approaching retirement’ was defined as ‘age 55 and above’. This age has since been reduced to 50 (in July 2015) and above. Please note that it is guidance that is being provided by Pension Wise, not advice; the guidance will not tell people what to do but help them to understand the choices they have and potentially identify the number of options which they may want to consider.Firms regulated by the Financial Conduct Authority (FCA) are required to include a clear and prominent statement about guidance in communications to customers about retirement, and to recommend that they seek guidance or advice FCA Policy Statement PS14/17

The Pension Wise service provides a free  45 – 60 minute conversation with a pension expert who helps customers understand their retirement options.

The ‘five stage process’ of guidance that the client can expect will be: 

• Set the scope, purpose and limitations of the service

• Request information about the consumer's pension entitlement

• Request information about the consumer's financial and personal circumstances and objectives

• Discuss relevant options based on the information provided, including the key facts and consequences for the options, and other issues for consumer to consider

• Set out next steps, and signpost to further sources of information, guidance or advice.

A record of the interaction will be provided that sets out the relevant options, key facts, and consequences of each of the options and will include information on ‘what to do next’.

The guidance given under this service may be sufficient for some people to come to an informed decision, however, in many cases it will highlight the need for the client to seek further, regulated, advice.

Provision for the guidance service is in the Pension Schemes Act 2015 (section 47 and Schedule 3).

In addition to the above, the Financial Conduct Authority has introduced a second line of defence to protect consumers. From April 2015 firms operating personal pensions, stakeholder pensions, selling pension decumulation products or facilitating the access of pension savings on an execution-only basis, must comply with the rules. These affect all consumers who have contract-based or occupational trust-based DC pension funds.

Firms are required to give appropriate retirement risk warnings to consumers accessing their pension savings. Firms must ask the consumer relevant questions, based on how the consumer wants to access their pension savings, to determine whether risk factors are present. If they are, risk warnings must be given.

The retirement risk warnings must be given to the consumer regardless of whether they have already received guidance from Pension Wise or taken regulated advice.

"These warnings may include setting out options the consumer has, such as shopping around. FCA states "We think that these retirement risk warnings can be given without providing regulated advice; we are not requiring firms to tell consumers what to do or implying that the consumer's decision will be wrong. We are simply requiring firms to ensure the consumer is aware of the risks of the course of action they are seeking to take."
(FCA Policy Statement 15/4 - issued 27/02/15).
 

Firms will be required to personalise the warnings to the individual’s circumstances and the choice they are making, by asking a series of questions and actively engaging with the customer (rather than by reading out a scripted statement). Areas that need to be covered include:

The following represents core expectations based on how consumers access their pension savings

Expanding on these risk factors:

Following consultation inCP15/30 ‘Pension Reforms, policy statement 15/4 and confirmed in PS16-12 – the FCA have confirmed that firms are best placed to identify the relevant risks for their customers and being more prescriptive would risk making the process and consumer journey ridged and turning it into a tick box exercise. Furthermore, standardised statements would go against the policy intention of engaging customers. When deciding how best to engage the consumer, including which medium to use to deliver the warnings, firms should consider not just the business need but also what works best for their customer.

On 3 February 2017, the government announced a £1,500 limit, to be accessed in £500 blocks on up to three occasions would be available from April 2017, but can only be used once in a tax year. There will be no age restrictions, and consumers will be able to use this allowance to pay for robo-advice as well as face-to-face services. The allowance will not be available to defined benefit pension holders but can be accessed by those in hybrid schemes as long as they have a defined contribution element. The tax-free amount would be in addition to the tax free lump sum available when benefits are ultimately taken.

Pensions fraud can be devastating, leaving victims without the means to fund their retirement. Since January 2019 unsolicited calls about members pensions are illegal and companies breaking this rule can face fines of up to £500,000.

The FCA have also launched ScamSmart to help individuals avoid pension (and investment) scams. The FCA website provides access to a list of firms to avoid.

The FCA deemed too many non-advised drawdown customers were investing mainly in Cash funds without understanding how this affected their potential for fund growth.

FCA Policy Statement 19/21 tells drawdown providers that from 1 February 2021 they must offer default investment pathways for consumers who enter drawdown without taking regulated advice.

Investment pathways will be based on certain criteria, eg within the next 5 years does the member plan to;

• leave their fund untouched?

• start taking a long-term regular income?

• use the fund to buy an annuity?

• take the full amount of pension fund?

Only one pathway can be offered per option for a client (although these can be tailored to clients age). For example not all clients’ selecting option 1 may be offered the same fund(s) for that pathway, this could allow for target dated funds based on a client’s age.

Whilst there is an easement for smaller companies, larger companies  must offer at least 2 of the 4 pathways to customers. Large companies will to refer consumers to another provider’s pathway solutions for any objectives for which they don’t themselves provide a pathway solution.

The aim being that a consumer can only invest mainly in Cash if they take an active decision to do so.

Investment in Cash risk warnings

Another step towards making Cash an active investment decision is that providers will have 6 months from the date FCA rules come into force to assess their clients and provide risk warnings where necessary.

Risk warnings must be provided to;

1. non-advised consumers moving funds into drawdown or requesting a drawdown transfer, and
2. non-advised consumers already in drawdown,

where more than 50% of the total drawdown pot is invested in cash (including cash-like assets).