9th May 2014
MPs have aired concerns about ‘defective’ products being developed in reaction to the relaxation of the pension drawdown rules.
There has been much speculation about a new swathe of pension insurance policies and new-style annuities being developed following changes to drawdown rules that will make it easier for retirees to access their entire pension pot.
Under the Budget changes, both types of drawdown policies – where pension pots remain invested and an income is taken – were given a radical makeover. ‘Capped’ drawdown allows retirees to take an income capped at a certain level set by the Government Actuary’s Department (GAD) and known as the GAD rate. The rate has been increased from 120% to 150% of an equivalent annuity.
Changes were also made to ‘flexible’ drawdown, which allows retirees to take their entire pension pot as long as they have a guaranteed income – such as another pension – coming in, known as the ‘minimum income requirement’ (MIR). The MIR was reduced from £20,000 to £12,000 under the Budget and a consultation is now ongoing to scrap it altogether when the single-tier flat rate pension is introduced next year.
In its response to the Budget changes, the Treasury Select Committee has said that while consumers will benefit from greater financial freedom there is a risk of new unsuitable products being developed.
‘The market is likely to adapt, offering a new range of financial products for those approaching retirement,’ said the committee in its response. ‘It is crucial that these products are not defective. Were they to be so, the reputation of the financial services industry, which has suffered severe damage in recent years from large scale mis-selling, would be further tarnished.’
Pensions providers, which have seen a slump in the number of retirees purchasing annuities, are already discussing the possibility of annuity-drawdown hybrids. This could see pension pots used to buy an annuity of a set income – maybe to cover household bills – and the rest of the pot to remain invested and draw down. The idea of a pensions insurance for those who go into drawdown and then run out of money has also been floated.
Committee chairman Andrew Tyrie said the City watchdog, the Financial Conduct Authority (FCA), must uses its new powers to intervene before consumer detriment arises in the shaping of a new pensions landscape.
‘Consumers will lose from heavy-handed regulation or the extension of box-ticking culture that has bedevilled conduct regulation,’ said Tyrie. ‘This achieve little and often protected nobody. Effective regulations are badly needed, encouraging innovation, but the FCA must also act quickly to bear down on consumer detriment where necessary.’
Fallen at the first hurdle
Pensions expert Ros Altmann agreed with the committee’s response to the Budget and welcomed the decision to stop forcing pensioners to buy poor value annuities but she warned the regulator was already failing to tighten its grip on unsatisfactory pensions products.
She highlighted the launch of one-year annuities that offer a stop-gap that allow consumers to take their 25% tax-free cash before the drawdown changes come into full effect next year without committing to a lifetime annuity.
‘It seems that the FCA may be failing its initial test,’ she said. ‘someone with a pension fund of £100,000 would take £25,000 tax-free cash and then £75,000 goes into the one-year annuity. This is actually an income drawdown fund that earns only around 0.5% interest for the year – a very poor rate.’