Cashing-in pension pot 'may be costly'

Many people are making a poor financial decision by taking some of their pension pot in cash, a regulator says.

Some pensioners could receive 37% more retirement income every year by investing rather than cashing in, the Financial Conduct Authority (FCA) said.

Workers should be given more guidance about what to do with their pension, and could be sent "wake up" information packs from the age of 50.

Savers can cash in their pension from the age of 55.

The reforms were introduced by the chancellor at the time, George Osborne, in April 2015. By September 2017, some 1.5 million pension pots had been accessed.

Previously, people would have bought an annuity - a financial product that provides a guaranteed retirement income - with their pension pot, although this is an option that remains open to them.

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Three-quarters of consumers who took money from their pension pots did so before the age of 65, but the FCA is concerned that they are not always getting a good deal - partly because they stick with the same pension provider.

Some choose a so-called drawdown pension - which allows them to withdraw as much money as they like at any one time while the rest remains invested in a pension. Twice as many pots have been used for drawdown than to buy an annuity.

'Not for the faint-hearted'

Glenn Mousley, 64, ran an events management company and decided to stagger his retirement.

As a seasoned investor, he decided that converting two pensions to an income drawdown product was the best option for him.

He argues that it allows him to take an income while still growing his pension pot, and offers him the opportunity to leave money to his family.

Mr Mousley, who is a battlefield guide in his spare time, said it was important to understand the products you were signing up to.

"You have to do your homework. This is not for the completely faint-hearted, you have got to accept that markets go up and down," he said.

The FCA warned that some people could be paying too much in charges and that, by switching provider, consumers could increase their annual income by 13%. However, it said many of these charges were complex, opaque and hard to compare. It suggested these charges could be displayed in pounds and pence and has not ruled out a cap.

It said many would be better off re-investing some of the money they drew from their pension - and drawing an income from that - rather than keeping it as cash.

This would add an extra layer of complexity to their financial affairs, so more help should be given to people ahead of such a major decision, the FCA said.

More support needed

The regulator is proposing that pension providers send "wake-up" packs to their customers at the age of 50 and for every five years after that until they access their pension. This would include a single-page summary in clear language.

"We know that the choices introduced by the pension freedoms have been popular with many consumers," said Christopher Woolard, executive director at the FCA.

"However, they are now required to make more complicated decisions than ever before. Many people need more support when making choices."

Providers have said that these information packs need to be well designed.

Tom Selby, senior analyst at AJ Bell, said: "We believe much of the literature issued to customers is barely read and poorly understood, and have long called for a fundamental rethink in this area.

"Our own research points to a lack of engagement and understanding among many drawdown investors, with accessing tax-free cash often the priority."

Huw Evans, of the Association of British Insurers, which represents many pension companies, said: "We have already laid the foundations for how a drawdown comparison tool could work in practice because we recognise how important it is for customers to be able to shop around. We agree a simpler presentation of charges will need to be a part of that."

However, Frank Field, who chairs the Work and Pensions Committee, said the FCA should act quicker in ensuring reforms.

"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," he said.