- New FCA regulations come into effect from 1 December 2023 requiring non-workplace pension providers to offer a ‘default’ fund to new non-advised pension savers (FCA PS22/15: Improving outcomes in non-workplace pensions)
- The regulations also require providers to send a cash warning letter to all non-workplace pension savers who hold more than 25% of their pension fund in cash for more than six months
- The letters include a warning about the effects of inflation and will be sent direct to both non-advised and advised pension savers
Rachel Vahey, head of policy development at AJ Bell, comments:
“From next summer advised clients could start receiving direct warnings they are holding too much cash in their pension pots.
“Although these may give your clients a shock, there might be very good reasons they are holding a significant proportion of cash or cash-like investments, especially in these times of high interest rates. For example, they may be holding money for transaction purposes or in anticipation of investing.
“But if you think your clients may fall into this category it’s probably worth having a word with them before the cautionary letter drops into their inbox. You may want to remind them of their current investment strategy and make sure they know the provider’s warning may be coming.
“The FCA’s rules were finalised last year when the world economy was in a different place. As more people have turned to cash as a savings asset over the past year due to high interest rates, there is a possibility some pension savers may be caught unaware by the new rules. For example, some could hold cautious MPSs which may hold more cash or cash-like investments. If so, advisers will want to work with their clients to make sure they don’t rush into making knee-jerk reactions by switching investments.
“These new cash warning rules also apply to non-advised consumers. The warning their current investments are unlikely to grow sufficiently to meet their objectives could prompt more consumers into seeking help from financial advisers.”
The new cash warning rules
Providers are required to send a warning direct to pension savers if they hold a significant amount of their pension fund (25% or more) in cash or cash-like investments for more than six months. Checks will be carried out roughly every three months, and if the customer’s investment is high in cash over all checks in a six-month period, then providers have to act. Once a cash warning is sent, providers don’t need to issue another one until at least 12 months later if the customer’s investments continue to be high in cash.
These rules apply to both advised and non-advised customers who are more than five years away from their normal minimum pension age (or lower protected pension age if they have one) and have at least £1,000 of their pension fund in cash or cash-like investments.
They don’t apply where the pension saver has appointed a discretionary fund manager (DFM) for the investment of their non-workplace pension.
The warning letters have to include a generic illustration showing the effect of inflation on an example pension of £10,000 over a ten-year period using a current rate of inflation, probably CPI.
Similar but different to drawdown cash warnings
Cash warning letters also have to be issued to consumers who hold a significant amount of their drawdown fund in cash. But there are a few important differences.
The rules kick in when the consumer first goes into drawdown, or transfers from one drawdown contract to another. If the pension saver holds more than 50% of their fund in cash or cash-like investments, the provider first has to make sure the consumer has made an active decision to do so, and then send them a cash warning.
If the pension saver remains invested in cash and cash-like investments, the provider has to send them an annual cash warning.
Importantly, the cash warning rules only apply to pension savers who don’t hold 50% or more of their fund in a decumulation investment pathway. So even if this investment option is 100% invested in cash (which may be the case for some providers) the cash warning rules don’t apply to these pension savers.
The rules also don’t apply where the client is working with a DFM or financial adviser to execute investment decisions for 50% or more of their drawdown fund.
The new default investment fund rules
Another requirement under the new rules is for providers to offer a ‘default’ fund to non-advised consumers, both when a consumer first takes out or funds a pension, but also on other occasions when they are presented with a list of investments to choose from. The default fund has to be displayed prominently, at the top of any list. However, the consumer doesn’t have to opt for this suggested option; they are free to choose whatever investments they want.
The fund has to be appropriate for the target consumer market. It doesn’t have to include lifestyling and the FCA instead says this should only be included where it’s appropriate for the target market. This gives some welcome flexibility to providers not to include features their customers don’t need or want.
