Another area of increasing interest to the FCA is non-advised drawdown. Since the freedoms, unadvised consumers make up 30 per cent of drawdown designations – a six-fold increase from 5 per cent before April 2015. The FCA wants to mitigate the risk that many of these consumers will not know how to manage longevity and investment risk in drawdown.
One of the key issues the FCA highlighted in its Retirement Outcomes Review interim report was mistrust. Its research found that mistrust was one of the main reasons behind unadvised consumers fully withdrawing their pension funds.
The majority of full withdrawals so far have been from small pensions, with up to 80 per cent under £30,000 according to one study, but Sipps on average are more likely to be higher in value. Additionally, those opening new Sipps are more likely to be seeking the features of the pension rather than planning a full withdrawal.
That said, mistrust is still a serious, industry-wide issue. If consumers are put off from pension saving due to mistrust, where will the next generation of Sipps investors come from?
There is another argument stemming from the FCA’s recent research, which concluded that the first group of consumers to use the pension freedoms are unlikely to be representative of later groups. The first two years of the freedoms have seen investors flock towards the new flexible retirement options, but will this continue long term? Perhaps, if and when stories of individuals running out of money for their retirement start to creep in, we’ll see guaranteed income products increase in popularity once again.
Of course, using this as an argument against the continuing growth of Sipps ignores the possibility of developing guaranteed income solutions. The FCA discussed the lack of market innovation so far in the Retirement Outcomes Review report, and it’s possible it will take steps to encourage innovation in the future.
On balance – and simply put – it’s probably too soon to tell. Considering pensions are a long-term savings product, it’s easy to forget just how quickly and dramatically the rules have evolved. At the beginning of this decade flexible drawdown did not yet exist, and now we find ourselves trying to predict the long-term effects of its successor.
Individuals who chose to delay taking benefits for only a few short years now face vastly different options and considerations.
What happens next will depend on how all of these different factors develop. What’s clear is that the industry needs to find solutions that work for consumers, advisers and providers alike: for example, finding ways to support unadvised drawdown rather than restricting it. If it can rise to these challenges then the whole industry, including Sipps, has the potential to thrive.
