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Non-workplace pensions – getting people out of cash

5 months ago

Towards the end of last year the FCA published the much-delayed consultation on non-workplace pensions. The consultation proposes two major changes – the first relates to default investments, the second to cash warnings.

The rationale behind the proposals is sound; there are too many people who have their pension sitting in cash and something needs to be done. It’s pleasing to see that some of the lessons from investment pathways for drawdown customers have been learned, and the FCA has taken a less prescriptive approach this time round.

When it comes to default investments, if it is clear that the customer has been advised on their investments, then no default needs to be offered. Also, unlike with investment pathways, advisers won’t need to first consider and rule out the default before recommending an alternative. This is good news for both advisers and providers alike – no extra work for advisers, and no unnecessary process for providers to go through for advised clients, who are not the problem that needs to be solved.

So, some good news on the default investment front, with just a couple of niggles for providers. We’d prefer to have the flexibility to design a few more tailored investment solutions rather than one single default fund. This is not the FCA’s preferred approach, and initial conversations indicate this is unlikely to change. The second point is around lifestyling. For SIPP customers with no target retirement date, and where the vast majority will go into drawdown, this is just an out-of-date, inappropriate concept. The paper is a little confusing on this matter. The proposal is that lifestyling of the default is required unless the “needs, objectives and characteristics of consumers in the target market […] are incompatible”- but then goes on to say: “We think this is unlikely”. Which leaves us in the position of not knowing if it’s required or not. We will certainly be making the case that it shouldn’t be a requirement, and the concept of a single retirement date is antiquated – especially in the SIPP market.

The second part of the paper is focused on cash warnings, and here the FCA make no distinction between advised and non-advised clients. Warnings are to be issued when more than 25% of the pension is held in cash for a period of six months or more. Where the criteria are met then a generic illustration must be issued showing the impact of inflation. The requirement falls away within five years of normal minimum pension age (or a protected age if earlier). The FCA considered an exemption for advised customers, but concluded it was simpler to make the rules apply to all.

From an adviser point of view this requirement is unlikely to have a big impact – clients will either be invested or have a good reason not to be. What this should do is pick up those who were once advised, but where there is no ongoing relationship and cash has built up.

Overall these are positive steps to help those who need it, without too much hinderance for those that don’t.

This article was previously published by SIPPs Professional

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Lisa Webster
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Lisa Webster

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Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.

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