A new report from the Financial Conduct Authority this week revealed that more and more people in the United Kingdom are drawing their pension early without taking independent and qualified advice. This has prompted a warning from the financial watchdog.
30% of consumers go into drawdown without getting guidance said the report, and that compares with just 5% before pension freedoms were introduced in April 2015 by the then Chancellor of the Exchequer George Osborne. The report also says that those who access drawdown policies before the age of 65 by and large tend to stick with their current provider, rather than shop around. This could lead to many of them having a poorer deal than they could have had. Twice as many people now are using drawdown rather than annuities, which are products that provide people with a fixed income for life. Worryingly, says the FCA, this could lead to many annuity providers to leave the market, weakening competition and leading to poorer value products.
However, whilst the Financial Conduct Authority said that withdrawing money from pension pots had become the new norm, the pensions industry has disputed this claim. In a report by the Association of British Insurers, it said that 100,000 people take money out of their pension pot every year. However, this pales in comparison to a number of people over the age of 55 who leave their pots untouched, numbering 4.7 million.
According to the FCA report, 52% of pots that were fully withdrawn were not spent but were placed into alternative savings and investments. This was due to a "lack of trust" in pensions it said.
- 2% put the money into savings accounts or ISAs.
- 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
Some of these investment decisions could lead to some consumers paying too much tax or missing out on investment growth said the FCA.
Christopher Woolard, director of strategy at the FCA, said: "Since the introduction of the pension freedoms, the retirement income market has changed substantially."
"We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future. Ensuring this market works well will require cooperation across Government, regulators, the industry and consumer bodies."