The FCA’s  Retirement Options: interim report warns that a lack of trust, limited understanding of pension retirement options and muted appetite for taking advice could damage employees’ retirement prospects.

‘Act in haste’ could have been the motto for the freedom and choice reforms introduced in April 2015. Now, with the opportunity to review at leisure, the Financial Conduct Authority’s (FCA) interim report has identified a number of cracks in the system. 

Fifty-three percent of pension pots that have been accessed since the freedoms were introduced have been fully withdrawn – although in many cases these will have been relatively small sums.

Of those savers who have withdrawn cash, nearly a third (32%) put the money into ISAs or other savings and 20% invested money elsewhere, such as property or shares. A quarter spent some or all of the cash, and 14% used it to pay off debts. 

Malcolm McLean, senior consultant at Barnett Waddingham said that re-investment of pension pots in other products suggested a lack of trust in pensions, and also “the possibility of a deep misunderstanding of the tax and other consequences of mismanaging individuals’ pension savings”.

The FCA also highlight concerns around flexible drawdown. In what feels like a defined contribution Groundhog Day, the report states that consumers are not shopping around for drawdown products, but simply accepting the option offered by their current provider – the same problem that was rife in the annuity market before the introduction of the reforms. Only 30% of those who have taken up drawdown products sought advice before they did so. “It is significant that yet again we are learning that consumers are following the path of least resistance,” said McLean.

He called for “greater regulatory intervention in a market that is not working as well as was expected.”

Some of the regulatory ideas mooted in the report include a default investment path, possibly including a charges cap, and additional protection for consumers who buy drawdown without advice.

TUC general secretary Frances O’Grady backed the idea of a default option: “The government needs to learn from the successful roll-out of auto-enrolment. Ministers must ensure all savers are offered a decent option by default.” The Pensions and Lifetime Savings Association (PLSA) is also in favour of an approach that acknowledges individuals will opt for simplicity. Tim Gosling, policy lead, DC at the PLSA called for both a “smoother customer journey at retirement that makes the line of least resistance an income product rather than cash”, as well as “a new generation of high quality retirement income products”.

However, not everyone is convinced that more regulation is the answer. Tom McPhail, head of policy at Hargreaves Lansdown described the report as a “regulatory cry for help”, with the FCA trying to put the “pension freedom genie back in the bottle”. He said better engagement from investors and more support to enable them to make good decisions would be a better approach than measures that potentially stifle competition.

It is still formative days for freedom and choice, but the FCA’s report has identified some clear concerns. Whether the industry uses this as an early warning system and addresses the problems with new approaches and products, or waits for default options to be imposed upon it, is in its own hands.