FCA announces thematic review of retirement income advice

01 March 2023. Published by Faheem Pervez, Associate and Patrick Barclay, Associate

The pension freedom reforms changed the way consumers access their retirement funds. This FCA thematic review will put firms under the spotlight with a focus on how the retirement income advice market is functioning in response to changing consumer needs in the current economic downturn.

On 19 January 2023 the FCA announced a thematic review assessing the advice consumers are given on meeting their income needs in retirement.

Previous FCA work on this topic, known as 'Assessing Suitability Review 2', was paused to allow FCA resource to concentrate their response to Covid. This thematic review will examine how the retirement income advice market is operating and focus on advice provided to consumers to ensure firms understand the needs of consumers and provide consistently suitable advice with a quality outcome for consumers.

Of particular interest is pension drawdown which is the process by which consumers withdraw regular income from a pension whilst the balance of the capital fund remains invested. This contrasts with purchasing an annuity which requires a saver to use their pension fund (or some of it) to purchase retirement income.

Pension drawdown has become more popular since the advent of Pension Freedoms in 2015. It was available prior to the Pension Freedoms but the amount that could be taken was limited. That restriction has been removed and there has been an increasing shift towards consumers drawing income from their invested pensions funds.

In practice many consumers will take advice from a financial advisor on how to invest their pension and on what level of income to take. Given the broader range of options now available on retirement it is important consumers receive suitable advice when they access their pension funds. The advice can be complex so it is important that the advisor businesses understands its client's needs and delivers consistently suitable recommendations.

A key concern, given the financial pressures in the current economic climate, is that consumers draw too much income and run out of money in retirement. This is particularly relevant given increasing life expectancies and rising living costs. If a consumer does deplete their fund they may claim they should not have been exposed to the risk and blame their advisor for not properly assessing their income needs in retirement, not advising on a sustainable level of income withdrawal and / or failing to challenge their income objectives.

The review began early in Q1 2023 with the FCA aiming to publish a report setting out its findings in Q4 2023. It is in the information gathering stage with the FCA, noting that this is a relatively new area of concern. With significant sums having been transferred from defined benefit pensions in recent years, and combined with the challenging economic climate, this is an area that is likely to attract continued attention from the FCA.

The FCA review will link to the lifetime mortgages work in the FCA 2022/23 Business Plan to better understand outcomes for consumers in later life. The findings will also provide an important indicator of how firms are implementing the Consumer Duty.

Firms selected for review can expect to be contacted in early 2023.

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