Adrian Boulding: Drawdown investment pathways deserve another look

By Adrian Boulding

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Feb 21, 2019
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As part of its retirement outcomes review, the FCA has been looking at non-advised income drawdown policies; specifically, the fact too many people are leaving their savings in cash regardless of how long they intend to keep the money there for. Adrian Boulding L&G 2012 - correct size

The regulator wants customers to set out their plans for the five years ahead.

The essence of its recommendation is that providers of income drawdown policies should offer a range of prescribed investment pathways for non-advised customers, under which the provider has picked a fund mix suitable for their intended patterns of drawdown.

The recommendation flowed from the FCA’s own research which found too many consumers were motivated purely by the desire to get hold of their 25 per cent tax-free cash as quickly as possible, paying scant attention to the remaining 75 per cent often left in drawdown pots.

The regulator wants customers to set out their plans for the five years ahead.

The essence of its recommendation is that providers of income drawdown policies should offer a range of prescribed investment pathways for non-advised customers, under which the provider has picked a fund mix suitable for their intended patterns of drawdown.

The recommendation flowed from the FCA’s own research which found too many consumers were motivated purely by the desire to get hold of their 25 per cent tax-free cash as quickly as possible, paying scant attention to the remaining 75 per cent often left in drawdown pots.

The situation has been made worse by the fact many providers are defaulting non-advised policyholders into cash or cash-like assets. Going forward, if customers want to keep their assets in cash, they must make an active decision to do so.

A finalised policy statement linked to these new investment pathways will be issued in July, with changes having to be implemented within the following year. So, what might investment pathways look like come July 2020?

Providers must offer one solution for each of the following objectives:

  • Option 1: I have no plans to touch my money for the next five years
  • Option 2: I plan to use my money to secure a guaranteed income within the next five years
  • Option 3: I plan to start taking my money as a long-term income within the next five years
  • Option 4: I plan to take out all my money within the next five years

The FCA is also proposing an additional five-year anniversary statement be added to the annual statement immediately before the customer reaches that point. This should be in the form of an enhanced prompt to review their investment decision.

Good ideas and best practice can flow both ways in our industry. It would make sense for IFA firms to consider whether some of the new rules about to be imposed on providers as a result of these changes might help them segment their own clients in drawdown.

If the FCA can receive data from execution-only shops about how many of the customers they have in each of the four options above, they may expect advisers to have completed the same sort of segmentation work.

And with the FCA mandating the investment pathways must also include a report on environmental, social and governance considerations, it might be worth getting ahead of the game by providing regular ESG reports too.

Adrian Boulding is director of retirement strategy at Dunstan Thomas 


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