Retirement Outcomes Review phase 3 - a reminder of what’s coming up in February 2021

Phase 3 of this Retirement Outcomes Review focuses on:  

• The introduction of ‘investment pathways’ for customers entering drawdown, without taking any financial advice. 
• Making sure that customers entering drawdown only invest all or most of their pension savings in cash or cash-like assets if they make an active decision to do so.
• Giving drawdown customers information about all the costs and charges they’ve paid, within their yearly statements.

These changes will be introduced from 1 February 2021.

Although these changes are primarily aimed at non-advised drawdown customers, they also apply to advised drawdown customers, so advisers will need to make sure that their processes are fit for purpose and/or they have a robust and compliant process in place for 1 February 2021.

What changes are being introduced?

Let’s take a look at the changes in more detail. 

Investment pathways

From 1 February 2021, pension providers must offer ‘investment pathways’ to non-advised drawdown customers who move all or part of their pension savings into drawdown or transfer money already in drawdown to a new drawdown plan.

These customers must also be offered the choice to stay invested in their current investments (if available) or choose their own investments.

Customers who choose the investment pathways will be presented with four options and asked to choose the one that most closely matches their retirement goals:

• Option 1: I have no plans to touch my money in the next 5 years.
• Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years.
• Option 3: I plan to start taking my money as a long-term income within the next 5 years.
• Option 4: I plan to take out all my money within the next 5 years.

Once they’ve chosen an option, the customer will be offered an investment pathway solution which they can select and they’ll be reminded about their chosen investment pathway in their yearly statement.

The FCA are also introducing a new drawdown comparison tool to allow non-advised drawdown customers to compare drawdown products and investment pathways. Royal London won’t appear on this tool as we don’t sell direct to the general market.

What does this mean for you?

When you’re recommending an investment solution for your drawdown clients, you should also consider the four new investment pathways and whether or not they’ll better meet your clients’ needs.

If you don’t recommend an investment pathway, you must be able to demonstrate why you’ve chosen an alternative solution and why it’s more suitable for your client. For example, you’re providing an ongoing advice service which reviews the client’s investments regularly to make sure they remain appropriate.

Cash warnings 

Non-advised customers entering drawdown or transferring pension savings already in drawdown must be given a warning about the potential risks of cash investment, including the effects of inflation, if they’re investing more than half of their pension savings in cash or cash-like assets. Customers investing more than half their pension savings in an investment pathway are exempt from this.

Customers will be given ongoing cash warnings while they remain invested in cash, as part of their yearly statement.    

What does this mean for you?    

Although this change is primarily focused on non-advised drawdown customers, you should keep this in mind for any of your clients invested in cash and continue to review their investments to make sure they continue to meet your client’s needs.   

Cost and charges information

To improve transparency and help customers understand their costs and charges, all drawdown customers or those who’ve taken an UFPLS payment, must be provided with information on the total costs and charges, including transaction costs and advice costs they’ve paid, in their yearly statement. This information must be provided in cash terms. 

Providers will also need to tell customers who ask to access their money directly that they're paying an adviser charge and how much this charge is, before going ahead with their request. 

What does this mean for you?  

You might receive queries about costs and charges from your clients, so you’ll need to explain what the costs are. This is an opportunity for you to promote the value of your services and the benefits of financial advice. 

We have a range of support material to support your client conversations about the financial and emotional benefits of financial advice, including:

• A research report, Feeling the benefit of financial advice, which found that people who talk to their adviser regularly, are emotionally and financially better off in the long term.
• A client report, infographics and social media tiles, which can be personalised with your own company logo, to help you run your own value of advice campaign.
• Short videos from advisers and customers about the value of advice and how it’s helped them deal with life’s shocks.