The FCA recently published its final report on the Retirement Outcomes Review which has some interesting ideas to improve the experience of non-advised consumers, but some of the areas could cause difficulties for the SIPP sector.
Wake up packs

Changes are being suggested to the wake up packs with a new one page ‘headline’ document to be sent from age 50 and every 5 years after that, I doubt this will engage consumers without running the risk of them considering early withdrawal which could be detrimental.



Investment pathways

The FCA confirms that a number of investment pathways should be made available to non-advised customers at the point that they access drawdown, reinforcing the FCA’s view that customers should actively select cash, rather than it being a default. This is on the back of data showing that SIPP customers appear to be more engaged with their investment decisions, 77% knowing where they are invested compared to 29% of life insurance customers.
The one issue is this suggestion for SIPP operators to create investment pathways and monitor their effectiveness and performance! Clearly this isn’t an issue for life insurers or investment manager firms offering SIPPs as they provide an investment service.

Charges

It is proposed that costs are presented in pounds rather than a percentage to aid price comparisons, with a charge cap of 0.75% to bring it in line with workplace pensions. However, there has been no analysis of whether this is reasonable given the extra flexibility and choices that a full SIPP can provide to customers. To manage a charge cap where investment pathways are required could be very challenging indeed. The FCA did find that by switching providers, consumers could increase their annual income by 13%.

‘De-coupling’ tax-free cash from other pension decisions

One of the more surprising concepts was de-coupling tax-free cash from the retirement process. The FCA is keen that Government change the pension framework so that the decision to take tax-free cash can be made without consideration of the remaining drawdown pot. Analysis suggests many consumers don’t consider the ongoing investment strategy and make a decision about tax-free cash in isolation. This appears to be due to drawdown being seen as a standalone product, which may be true in an insurance company pension however for most providers and certainly within the SIPP market it comes hand in hand as part of the regular SIPP offering.

The proposals could end up causing further consumer confusion where simplicity is really required. Feedback from clients and advisers alike already suggests customers are overwhelmed by choice and volume of paperwork arising from regulatory change. Hopefully any final outcomes strike the right balance.

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Elaine Turtle, Director, DP Pensions