New pension rules to prevent retirees from ‘sleepwalking’ into cash

By adopting a more appropriate asset allocation retirees could boost their pension income by 37%.

The financial watchdog the Financial Conduct Authority (FCA) has launched a consultation on new rules that aim to stop retirees from making poor decisions about how they invest their pensions.

As many as 100,000 over 55s go into income drawdown every year without seeking financial advice, according to the FCA.

Almost a third of those following this path between October 2015 and April 2017 had invested their retirement savings wholly in cash.

The FCA has previously expressed concerns that many consumers who do not seek advice "sleepwalk" into income drawdown and hold their retirement savings in investments that do not meet their needs.

This means that retirees may not be able to generate the level of income that they need, or find that they run out of money.

By adopting a more appropriate asset allocation - spread between equities, bonds, property as well as a small amount of cash - it says that retirees could boost their pension income by 37%.

As part of its proposals, the FCA wants pension companies to offer non-advised retirees four ready-made investment solutions, so-called investment pathways, depending on the financial objectives for their savings.

It also wants to scrap cash as the default option for those who do not specify where they want their money to be invested when they move into drawdown.

Christopher Woolard, executive director of strategy and competition at the FCA, says: “Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the 'path of least resistance’ when entering drawdown. 

"This can often mean that the rest of their drawdown pension pot is not invested in a way that meets their needs and intentions. 

"We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. This leads to poor consumer outcomes."

The four pathways outlined by the FCA are:

  • Those who do not plan to touch their money in the next five years
  • Those who plan to buy guaranteed income with an annuity in the next five years
  • Those planning to take long-term income from their pension within the next five years
  • Those planning to cash in their whole pension within the next five years

Woolard adds: “Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement."

This article was originally written by our sister publication Moneywise


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