Default investment option could help retirement savers build bigger pots

A new ‘default’ investment option to help DIY pension savers build bigger retirement pots has been proposed by the City regulator.

The regulator’s proposed changes would give people who have not taken financial advice the option of a “standardised” investment strategy and reduce the risk of their retirement income being eroded by inflation.

At present, those who are not saving into a workplace pension but making their own individual arrangements have to choose investments from an increasingly wide range of options, the Financial Conduct Authority (FCA) said.

This can make it hard for some customers who do not take financial advice to select the investments that will meet their retirement needs.

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The regulator’s proposed changes would give people who have not taken financial advice the option of a “standardised” investment strategy and reduce the risk of their retirement income being eroded by inflation.

The FCA said the non-workplace pension market is large, with around 13 million accounts and accumulated pension savings of around £470bn.

Such schemes are used by self-employed people without access to a workplace pension, as well as by customers wanting to supplement their workplace pension savings or consolidate existing pension pots.

Under the proposals, the default option would need to take account of climate change and other environmental and social risks. Investments would also need to be “appropriately diversified”.

Non-workplace pension providers would also need to warn customers holding high levels of cash and prompt them to consider investing in other assets with the potential for growth. The proposals are relevant to firms including life insurers, platform providers and self-invested personal pension operators.

They have been made at a time when the Consumer Prices Index (CPI) rate of inflation is running at a near-decade high, eroding the value of many people’s savings as living costs such as energy, fuel and food increase. It is thought inflation could potentially peak at 5 per cent next spring.

The aim is to ensure pension savers have as big a pension pot as possible at retirement, the regulator said. It is inviting responses to its consultation by February 18, 2022.

Sarah Pritchard, the FCA’s executive director for markets, said: “People spend decades working hard to build up a pension to support them in retirement, and we want their savings to work just as hard for them.

“These proposals will ensure that customers who don’t take financial advice can benefit from a professionally designed investment strategy, and reduce the risk of their retirement income being eroded by inflation.

“The proposals form part of our wider work on pensions, which is designed to ensure that customers are better supported throughout their pension journey.”

Tom Selby, head of retirement policy at AJ Bell, said: “With inflation threatening to rampage through the economy, ensuring savers with a long-term time horizon invest their money sensibly is hugely important.

“While people who choose to invest in a non-workplace pension have by definition exhibited a level of engagement, there is a risk some will either subsequently become disengaged or struggle to make good choices about where to invest their hard-earned retirement pot.

“In a worst-case scenario, they will end up shoving all their pension in cash and risk their money being eaten away by inflation.

“Having a default fund which is broadly suitable while also issuing warnings to those who invest in cash over long time periods could therefore help improve outcomes.”

Becky O’Connor, head of pensions and savings at interactive investor, said: “It’s really important that investors who want to do it themselves feel free to do so, while those that need a helping hand can access this, too.”

While many people in a non-workplace pension are more than happy to choose their own investments there will always be those who don’t have the confidence to make these choices, according to Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.

She said: “The use of so-called default funds can help these people by providing a robust central point to people’s retirement planning that they then build on with other investments and tax wrappers.

“From this point of view the proposals are a positive with the potential to bring real innovation.”

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Ms Morrissey added: “However, we must not forget the provision of high-quality guidance is also vitally important in empowering people to make more informed investment decisions throughout their retirement planning journey.