20th August 2015

Retirement risk warnings must be refined to improve consumer decision making and choice when accessing their pension pots, according to Royal London, following new research into what their clients have been doing since the April reforms.

In particular, the provider wants the Financial Conduct Authority to put more importance on initial tax charges when clients withdraw cash lump sums as it would likely be subject to emergency tax on payment. However, it is possible to reclaim any overpayment at a later date.

Fiona Tait, pension specialist at Royal London, stated: “Having extra focus in the retirement risk warnings framework would help to ensure that customers appreciate all the options they have within their existing pension; this is particularly important for those customers who are not willing or able to access financial advice.”

In February, the regulator published its without-consultation intervention to offer additional protection to clients accessing income under new pension freedoms, including requiring providers to offer risk warnings where client’s state they have taken advice or guidance.

The only exceptions to providing the personalised risk warnings will be if an adviser is acting on a clients behalf or if warnings have already been provided. Providers will need to ask limited personal questions and offer warnings specific to the method of access.

This follows research carried out by Harris Interactive UK with a sample of 800 Royal London customers between May and July which found that of those who had decided to take advantage of the pension freedoms, 69 per cent took all of their pension pot as a cash lump sum.

This means that, in most cases, 75 per cent of the cash sum those customers received was subject to an income tax charge.

Around 16 per cent of those surveyed said they intended to use the cash to clear their mortgage or other debts, however 32 per cent intended to withdraw their money in order to place it all in an alternative savings or investment vehicle, with 23 per cent intending to leave their money in cash within a bank, building society or cash Isa account which may pay a lower rate of return than their pension.

Ms Tait said: “The research indicates that around a third of people who are withdrawing cash do not appreciate that their options could include a switch to a similar investment fund within their existing pension plan without paying the tax charge for full encashment or switch to an alternative provider which allows partial encashment.

Now we have these findings, Royal London is looking to update the questions we ask in order to check future customers understanding of the implications.”

Phil Loney, Royal London’s chief executive has previously called for a review of the advice regime, particularly for the so-called ‘middle market’ customers, as it is often these savers that are left struggling to make these often complicated decisions on what they should do, without advice.

Ms Tait added: “Hopefully the government’s recent announcement for a review of access to financial advice and the effectiveness of the current regulatory framework will enable access to regulated financial advice to be more readily available to all UK consumers, so pension freedom customers will be better equipped to make these important decisions.”