LONDON (Reuters) - Britain’s markets watchdog should cap charges on drawdown of pension savings after “glacial” progress in stopping customers being ripped off, a senior lawmaker said on Thursday.
Britons have been able to cash in their pension pots since the country’s pensions market was opened up in 2015. But a review by the Financial Conduct Authority (FCA) published on Thursday found that people are not always getting the best deal and that there is a lack of transparency on charges.
“The FCA found that, while consumers have welcomed the freedoms, some are at risk of harm,” the regulator said, adding it was considering a cap on charges.
The regulator singled out the treatment of consumers who do not take advice when drawing down pension money, or taking cash out of a pot and reinvesting it to obtain a regular retirement income.
Between April 2015, when the new freedoms were introduced, and September 2017, over 1.5 million direct contribution pension pots were accessed, with most pots below 30,000 pounds ($39,260).
More than half of the fully withdrawn pension pots were not spent but transferred into other savings investments, often for drawdown.
This does not always provide value for money as people typically use their existing provider rather than shop around, the FCA said.
“The FCA found that charges vary considerably from 0.4 percent to 1.6 percent between providers and can often be complex, opaque and hard to compare,” it said.
The watchdog said it would give industry a year to show that the reforms it was proposing were actually driving down charges, before revisiting a possible cap on fees.
Frank Field, chair of parliament’s work and pensions committee, said the FCA reported “devilishly glacial progress” in the right direction, finding that people were being “ripped off by unjustifiably high and complex charges”.
“But the FCA wants another year to mull over a charge cap while life savings are shamelessly milked. There has been more than enough warning. They should just introduce it,” Field said.
Ros Altmann, an independent pensions expert and former pensions minister, said people were being rolled over from pensions which do have a cap, to drawdown funds where they don’t know what they are paying.
The Association of British Insurers said it agreed a simpler presentation of charges was needed to help customers shop around.
The FCA said some products had pricing structures with up to 44 different charges, and one in three drawdown consumers did not know where their money was being invested.
Providers were “defaulting” customers into cash or cash-like assets when income would be 37 percent higher over 20 years if the money was invested in a mix of assets, the FCA said.
“In many cases, keeping money in a pension would have resulted in better returns, on average, and in paying less tax,” the FCA said.
The watchdog proposed that pension providers send their customers a “wake up pack” from the age of 50 with a one-page document spelling out the risks before tapping a pension pot.
It is also consulting on requiring pension providers to offer “investment pathways” comprising three “value for money” options on what to do with money taken out of a pension.
A charge of 0.75 percent should be used as a point of reference, and firms would have a year to show that the “pathways” were working, otherwise a cap was “highly likely”.
Ian Browne, pensions expert at Old Mutual Wealth, said a cap would hinder innovation or even quality.
The FCA’s proposals will be put out for public consultation.
($1 = 0.7641 pounds)
Additional reporting by Carolyn Cohn; Editing by Gareth Jones and Mark Potter