One change that may have gone unnoticed during the pandemic is the Financial Conduct Authority (FCA) rules on pension drawdown. After a slight delay, as of this month, new rules will apply if you elect pension drawdown without taking advice.
This does not constitute advice and advice should be sought in all instances before acting on it.
Pension drawdown refresher
Drawdown is a way of getting pension income after retirement that still allows for your pension fund to continue growing. You simply leave your money invested and only take your regular income directly from your fund.
The amount you get will vary depending on the fund’s performance — your fund will grow when investments do well, but will also shrink if they don’t pan out — and it isn’t guaranteed for life. But with a pension drawdown, there is no limit on how much income you can choose to take from your drawdown funds.
Why the change?
In 2018, a mere three years after the introduction of the pension flexibility reforms, the FCA issued a consultation paper following a two-year review of the reforms’ impact.
They were particularly interested in pension owners who decided to use income drawdown to access their pension without actually seeking any professional advice, despite repeated prompts for them to do so.
FCA found that for many, the focus was solely on taking the tax-free cash and where the remaining funds to be used for drawdown were invested wasn’t the priority.
Still, one in three did not know where their drawdown money was invested, while others only had a vague idea. Because of this awareness gap, select pension providers were “defaulting” non-advised clients into cash or quasi-cash investments at drawdown which resulted in one third of the non-advised users of pension drawdown holding their entire fund in cash.
The major takeaway is that because of the way non-advised consumers hold their funds in investments, they will not be able to meet their retirement lifestyle objectives.
What’s changing?
To rectify this situation, the FCA suggested a mandate for pension providers to offer a range of “investment pathways” for drawdown funds, catered specifically to the client’s objectives for their pension. Additionally, they proposed specific warnings for individuals holding more than 50% of their drawdown fund in cash or cash-like investments.
The changes were originally set to be put into force back in August of last year, but the start date was pushed back to February 2021. The delay has been potentially damaging for some non-advised pension owners as cash returns are virtually non-existent.
Plan your retirement
Income drawdown is just one piece in your retirement puzzle. So to be sure your plan will help you save toward the retirement lifestyle of your dreams, work with an expert financial adviser.
At Dental and Medical Financial Services we provide advice based on your full financial picture, including your retirement goals. Get in touch to start planning for your future today.
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