New guidance by the Financial Conduct Authority also advises firms to give customers cash access to their pension funds if they decide they want this under the new legislation, which increased the maximum taxed lump sum from £2,000 to £10,000.
Issued yesterday, the FCA’s guidance aims to give post-reform pension advice to pension providers, annuity providers, income drawdown providers, financial advisors providing retirement income advice and intermediaries selling annuities and income drawdown products on a non-advised basis.
A statement from the FCA said: “In light of the budget announcements firms will need to make changes to their operational processes and procedures.
“They will also need to consider how to treat those customers who are making a decision about their retirement income in the coming year.”
Financial Advisers are now required to give “suitable advice” when customers are making retirement choices following the pension reforms, and are advised to inform customers that delaying any decision-making may negatively affect their annuity rates.
The regulator said that while it was publishing the advice without formal consultation, it would welcome feedback and comments from the industry and consumer organisations.
Companies are expected to review and revise their existing practices in light of the guidance.
The body has also listed several other actions it will be taking over the pension reforms. These included a ‘guidance guarantee’ offered to individuals at retirement age from April 2015, an intervention scheme monitoring business activities arising from the Budget, and a revision to its competition market study.
Keith Churchouse, director of Churchouse Financial Planning, says reform will simplify pensions in the long term but will create a transition period where many people reaching retiring age will suffer confusion.
“There are ambiguities surrounding the reforms, so the guidelines are a sensible advisory procedure by the FCA that will help deter any confusion,” he said.
“For a lot of people, their pensions form the biggest decision of their lives; it isn’t like getting a credit card wrong where you can fix the problem, you only get one chance.”
He also doubted that the whole industry would follow the guidelines.
“Many life companies are already in disarray and are fearful for their future business because they have relied on the pre-reform business model for decades now.
“I hope they will all adhere to the FCA’s advice, and if they are sensible then they will, but I have no doubt that in the next year there will be many tales of people getting misguided by companies; there will always be those who bend the rules to their own advantage.
“I think the reforms are an opportunity for the pensions industry to change its perception of itself, and I think the FCA will be stern in its regulation.”
Flexibility
In other news, the Government has announced today that people who have recently taken a tax-free lump sum from their defined contribution pension will be given 18 months rather than six months to decide what they wish to do with the rest of their retirement savings.
HM Treasury also said that in such cases people will not be put at a disadvantage should they wish to wait to access their pension savings flexibly.
Exchequer secretary to the Treasury, David Gauke, said: “We recognise that decisions people take regarding their pensions are important and take time.
“This extension to the decision making period will give people the opportunity to take full advantage of the new flexibilities introduced at the Budget.”
