Four New Pension Rules Can Boost Your Retirement Savings
Approximately 100,000 people can be saved annually from loss of pension income when they enter the income drawdown, following new proposals from the Financial Behavior Authority (FCA). The regulator has previously expressed concerns about the state of the retirement income market, finding that people are at risk of keeping their money in investments that do not meet their needs. Here, take a look at how income reduction works and how effective the FCA proposals are in helping consumers.
What is income reduction? Withdrawal of income is a way to take money from your retirement pot to live in retirement. It was introduced in 2015 under new retirement freedoms and allows you to capture 25% of your retirement savings tax-free. You can only start to use earnings until you reach the age of 55 and get a defined contribution pension.
Why are FCA changes made? In June 2016, FCA launched the Retirement Retirement Review (ROR) to investigate the state of the retirement income market after the introduction of retirement freedoms. One of the main findings of the review was that consumers did not really understand how income reduction works and how to manage their retirement funds. In general, the FCA found that one out of every three people who entered income withdrawals was not aware of how to invest their money.
To make the income-withdrawal process less confusing and help make consumers more interactive with their pension savings, FCA has put forward several proposals and recommendations, some of which will be implemented as early as November 2019.
4 Proposals May Affect the Pension Pot We have compiled four proposals, submitted by the FCA, which can change the way you deal with your pension and help increase your returns. 1) You’ll be presented with new “investment paths” The FCA review found that most consumers “did not participate enough” in making decisions about how to invest a pension. To help people play an active role in how the pension fund is invested, FCA will provide four new investment tracks that companies must provide to customers who enter the draw from income. This means that if you get tax-free income from your pension pot, an option will be offered between four goals for the remaining portion of your pension investment.
The service provider will give you the best solution for how to manage your database based on this choice. FCA opened a consultation last week for service providers to provide comments on this proposal and will issue a formal policy statement on how to operate in July 2019. Learn more: How to Invest in Income Drawdown 2) Your Pension Pot Will Not Be Abandoned If You Want to Get the Best Return on Long-term pension pot, it is important to be invested in a variety of asset classes such as equity funds, bonds, cash and cash-like assets. FCA found that 50,000 clients, who did not receive advice, currently have pension funds that have invested only in cash or cash equivalents, meaning they are losing large returns.
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When someone takes money from their retirement pot, companies will often offer the option of transferring the whole amount to a cash investment. Overall, 94% of customers who accessed their utensils without taking the advice accepted the cash option, compared to only 35% of their customers. To combat this, FCA suggests that service providers should not be allowed to transfer the pension fund to cash unless the customer actively requests them to do so.