LONDON (Reuters) - People withdrawing retirement savings early has become the norm in Britain, its financial markets watchdog said on Wednesday, highlighting that some may get low returns as a result and intervention might be needed.
More than half of people who take their pension savings early withdraw the full amount, the Financial Conduct Authority (FCA) said in an update on its review of the retirement market.
People have been allowed to get access to their pension savings following the introduction of new rules in 2015 that removed the need to use the money to buy an annuity, or a fixed income for life.
“Since the introduction of the pension freedoms, the retirement income market has changed substantially,” Christopher Woolard, the FCA’s executive director of strategy and competition, said.
“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future.”
One year into the FCA’s review, the watchdog found that twice as many pension savings “pots” were moving into so-called “drawdown” funds based on investment returns, which give flexibility on how much money can be taken out each year, rather than put into annuities.
Fifty three percent of pots accessed were fully withdrawn, although 90 percent of them were small, below 30,000 pounds ($38,000), and most of those doing so had other sources of income in addition to the state pension, the FCA said.
People who withdrew their pots did so partly because they did not trust pensions, it said.
While 52 percent of fully withdrawn pots were reinvested somewhere else, savers might be paying too much tax, missing out on investment growth and other benefits, the watchdog said.
Of those who fully withdrew their savings, 14 percent spent the largest share paying off mortgage or other debt, 25 percent spent it on home repairs, a car or other purchases, 32 percent saved most of it and 20 percent invested it in property, a business or in bonds or stocks.
Those who withdraw money early without taking advice typically followed the “path of least resistance” and stuck with their current pension provider for a drawdown product without shopping around, the FCA said.
With some large pension providers pulling out of the annuity market, there was also a risk of reduced competition over time, and product innovation was currently limited.
As a result, the FCA said it would look at whether extra protections were needed for consumers who buy drawdown products without advice, whether consumers were paying too-high charges and if they ended up with unsuitable investment strategies.
It would also look to improve competition by asking the government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot.
Consumers may also need better tools and services to help them better understand their options and improve trust in pensions, the regulator said.
The FCA said it would consider whether it should intervene at this stage and how it could do this most effectively.
Investment managers also warned that savers may not be making wise decisions.
Jon Greer, head of retirement policy at Old Mutual Wealth, said: “Savers are giving up future tax-free investment growth in a pension in exchange for comparatively low-growth assets like cash, or illiquid property.”
But insurers said the problem might not be as widespread as the FCA indicated.
Huw Evans, director general of the Association of British Insurers, said “Our own data does not support the view that accessing pension savings early has become ‘the new norm’.”
The FCA’s final report is due in the first half of 2018.
Reporting by Simon Jessop; Editing by Susan Fenton and Jane Merriman