FCA may cap charges on drawdown pensions

LONDON (Reuters) - Britain’s markets watchdog said it might cap charges on drawdown of pension savings if pension providers don’t give customers better value for money.

People have been able to cash in their pension pots since the UK pensions market was opened up in 2015. But a review by the Financial Conduct Authority found that people were not always getting the best deal and that there was a lack of transparency on charges.

“The FCA found that, while consumers have welcomed the freedoms, some are at risk of harm,” the regulator said on Thursday.

The regulator singled out the treatment of consumers who do not take advice when drawing down pension money, or taking cash out of a pot and reinvesting it to obtain a regular retirement income.

Between April 2015, when the new freedoms were introduced, and September 2017, over 1.5 million direct contribution pension pots were accessed, with most pots below 30,000 pounds.

More than half of the fully withdrawn pension pots were not spent but transferred into other savings investments, often for drawdown.

This does not always provide value for money as people typically use their existing provider rather than shop around, the FCA said.

“The FCA found that charges vary considerably from 0.4 percent to 1.6 percent between providers and can often be complex, opaque and hard to compare,” it said.

Charges should also be expressed in simple pounds and pence for the year.

The Association of British Insurers said it agreed that a simpler presentation of charges was needed to help customers shop around.

The FCA said some products had pricing structures with up to 44 different charges, and one in three drawdown consumers did not know where their money was being invested.

Providers were “defaulting” customers into cash or cash-like assets when income would be 37 percent higher over 20 years if the money was invested in a mix of assets, the FCA said.

“In many cases, keeping money in a pension would have resulted in better returns, on average, and in paying less tax,” the FCA said.

The watchdog proposed that pension providers send their customers a “wake up pack” from the age of 50 with a one-page document spelling out the risks before tapping a pension pot.

It is also consulting on requiring pension providers to offer “investment pathways” comprising three “value for money” options on what to do with money taken out of a pension.

A charge of 0.75 percent should be used as a point of reference, and firms would have a year to show that the “pathways” were working, otherwise a cap was “highly likely”.

“If firms fail to introduce investment pathways with appropriate charge levels, the FCA has not ruled out introducing a cap on drawdown charges.”

Ian Browne, pensions expert at Old Mutual Wealth, said a cap would hinder innovation or even quality.

“It makes more sense to define what effective investment pathways look like for people and then consider how to make them as cost-effective as possible,” Browne said.

The FCA’s proposals will be put out for public consultation.

Reporting by Huw Jones; editing by Jane Merriman and Gareth Jones

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