Individuals who are not able to save for retirement through workplace plans, such as the self-employed could receive simple, new “default” pension funds.
A pension firm would be required to offer any person who does not have a financial advisor a standardised investment fund. However, charges for this would not be limited at 0.75 per percent as in comparable work funds.
The Financial Conduct Authority proposes that firms issue alerts to customers who have high cash levels and recommend investing in assets with higher growth potential.
Pension plan: Retirement savers who have their own plans must make choices from a wide variety of investment options
People who have jobs get automatically added to their employer’s plan for pension.
A majority of workers, between 90-95 percent, remain with their employer’s default funds, regardless of whether they like it or not.
The FCA however states that investors who are making individual arrangements need to select from a greater variety of investments.
It can be difficult for customers to choose the right investments to meet their retirement goals if they don’t seek financial advice.
The FCA said the non-workplace pension market is large, with around 13million accounts and accumulated pension savings of around £470billion.
Self-employed persons without a workplace pension can use these schemes, along with customers who want to increase their pension savings and consolidate current pension pots.
According to the proposal, the default option should take into consideration climate change as well other risks that could affect the environment and society. The proposals also require that investments be appropriately diversified.
According to the FCA, it had considered charging a cap for new default funds that would mirror the 0.75 percent used by employers schemes but decided to “pause” the move.
According to it, “We expect suppliers to be aware of their obligations under our product governance regulations and under our proposed consumers duty,”
These proposals are made at a time when the inflation rate at 4.2% is nearing a decade high. This has eroded the savings of many people as their living expenses such as food, fuel, and energy rise.
The inflation rate could reach 5% next spring, according to some estimates.
Tom Selby from AJ Bell is head of the retirement policy department.
“People who invest in non-workplace pensions have, by definition, shown a degree of engagement. However there’s a chance that they will become disengaged later on or find it difficult to make wise decisions about how to spend their retirement savings.
“In the worst case scenario they’ll end up paying cash for their pension and then risk having their savings disappear due to inflation.
“Having a default fund that is both broadly appropriate and issuing warnings for those who have been investing in cash for long periods of time could help to improve results.”
Becky O’Connor from Interactive Investor is head of Pensions and Savings.
“It’s true, there are a lot of fund, trusts and ETFs available for investors who wish to choose their own funds. An investor can choose between different asset types, geopolitical areas and themes.
“On the risk cash”: Generally speaking, Self-Invested Personal Pension Investors don’t hoard cash.
They have a higher percentage than Isa or trading account customers. Interactive investor says they are slightly more. Cash can be held for various reasons.
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