The findings, published on Thursday in the regulator’s Retirement Outcomes Review, show that in the last quarter of 2015, 52% of consumers taking full encashment or making high rates of cash withdrawals from their pension savings via Uncrystallised Fund Pension Lump Sum (UFPLS), flexi-access drawdown or small pot lump sum payments.
Around 11% of consumers aged 55-59 withdrew 10% or more of their pension pot (after the deduction of tax-free cash for drawdown and/or pre-UFPLS payments) in the quarterly period October to December 2015.
The FCA said the trend is more prevalent among smaller pots, similar to data from online investment platform AJ Bell earlier this year which found that the average full withdrawal from pension pots since UK rule changes came into effect in April 2015 was just under £25,000 ($35,346, €31,673).
In fact, data from AJ Bell shows that only 1% of all withdrawals made in the last year were full withdrawals – with the majority of those being less than £30,000 in value.
The watchdog said the findings validated its initial concerns about post-pension freedoms.
“We highlighted concerns regarding the ability of consumers to make informed decisions and place competitive pressure on firms in light of increased choice and complexity and increased mass market access to higher-risk products.
“The developments outlined above suggest that these concerns are being borne out in practice,” said the regulator.
Non-advised drawdown
The FCA study also found more than a third of UK savers are now buying income drawdown products without receiving any professional financial advice.
Between October and December last year, 32% of consumers are entering income drawdown products without use of a regulated adviser.
This compares to 2013, where 97% of new income drawdown sales were sold through advice services.
The watchdog said the trend may be down to “the type of consumer purchasing income drawdown at that time”, explaining that due the pension freedoms, introduced in April last year, many savers with smaller pension pots may be buying these products.
“Prior to pension freedoms income drawdown consumers typically had significant pension pots to invest and were more able to afford independent financial advice,” said the FCA.
‘New phenomenon’
Describing non-advised drawdown as a “relatively new phenomenon”, Jon Greer, pensions technical expert at wealth manager Old Mutual Wealth, revealed that prior to pension reforms, savers need to show they had £30,000 per year secured retirement income from other sources before they could access the type of drawdown flexibility on offer today.
He urged clients to seek out professional financial advice to ensure they are getting the best deal and make the most of the “new normal” of increased choice.
“Our research with YouGov shows that 60% of those aged 50-75 who have never seen an adviser suggest they have little or no understanding of drawdown. This falls to 38% if the respondent saw a financial adviser to plan their retirement.
“40% of those who have never seen an adviser state they have no understanding of drawdown at all. This figure is more than halved (18%) if they saw an adviser,” said Greer.
However, Richard Parkin, head of pensions at Fidelity International hit out at the FCA, saying that it has failed to recognise drawdown as a way for people to access their pension savings rather than just as a product.
He added that the regulator’s focus should on the impact of taking lump sum withdrawals from savings rather than on the method.
“A large proportion of our customers are just taking tax-free cash and leaving the rest invested which technically puts them in drawdown. Yet until they start taking income, the issues around investment strategy and whether their money will run out need a different approach. The focus should be on the impact of taking lump sum withdrawals from savings and less on the way that this is done,” he said.
