People looking to access their pension savings will be given personalised “risk warnings” to help prevent them from making bad choices which could potentially be irreversible under plans announced by the City regulator.
The new consumer protection rules will come into force on April 6 – the same day that people aged 55 and over with a defined contribution (DC) pension are given the freedom to take their pension pot how they want, when they want to.
The Financial Conduct Authority (FCA) said that pension firms will be required to sound alarm bells to a consumer where needed, based on how they want to access their pension savings and what their personal circumstances are.
The regulator acknowledged that accessing pension savings in the new environment will present risks to consumers, such as an increased danger of being scammed.
It is particularly concerned about consumers who are generally not engaged with retirement decision-making, as this could lead to poor outcomes for them.
The trigger for firms to look into whether someone is at risk will happen when that person indicates either verbally or in writing that they have decided to take a specific action to access their pension savings.
Firms will need to personalise the warnings by actively engaging with the customer and asking them a series of questions. They will need to consider factors such as the state of a consumer’s health, the tax implications of what they want to do, the potential impact on any means-tested benefits as well as investment scams.
One example where a risk warning could be given is if someone with a partner or dependants is looking to access their savings to buy a “single life” retirement annuity. The FCA said the consumer should be aware that a single life annuity will not provide for their partner or dependants when they die.
Risk warnings could also be given if the saver has not considered how the charges they may face when investing their pension savings elsewhere compare with those on their pension savings. Warnings may include setting out the options that the consumer has, such as shopping around.
The new rules aim to give people a better understanding of the importance and knock-on effects of their decisions. They will also be encouraged to seek guidance from Pension Wise – the free, impartial service set up by the Government to help people decide what to do with their pension pots. They may also be prompted to seek regulated advice.
The regulator said if consumers have not received guidance or regulated advice, firms should help them to understand that accessing their pension saving is an important, sometimes irreversible decision, and that Pension Wise and regulated advice can help them to understand their options.
Firms will need to keep records to show that customers received relevant warnings and record whether they have taken regulated advice or guidance from Pension Wise.
The FCA said the risk warnings must be given to the consumer regardless of whether they have already received guidance from Pension Wise or taken regulated advice.
Exceptions to this general rule will happen if an adviser is conducting a transaction on behalf of a consumer they have given financial advice to, or if the firm has already provided retirement risk warnings under these rules previously, and it believes that those warnings are still appropriate.
Christopher Woolard, director of strategy and competition at the FCA, said: “The pension reforms give those people who are nearing retirement greater choice on what to do with their pension pots. We want to ensure that they get the right information so that they can make informed decisions about their future.”
The Government’s pension reforms will allow 320,000 people who retire each year with a DC pension to take it as they choose, subject to their marginal rate of income tax in that year. They will be able to take their pension all in one go or in a series of slices.
But earlier this week, the Association of British Insurers (ABI) cast fresh doubts over how prepared the Government and industry will be for the changes on April 6.
The ABI’s director general Huw Evans has predicted that “critical pieces of the jigsaw” will not be in place in time when the reforms go live.
Responding to the ABI’s concerns, the Treasury said that it will continue to work with industry “to ensure we are all ready”.