- Savers in non-workplace pensions such as SIPPs will be offered ‘default’ investments from 1 December under reforms being introduced by the FCA (PS22/15: Improving outcomes in non-workplace pensions | FCA)
- In addition, savers will be sent a warning if they hold 25% or more of their pension in cash or cash-like investments for more than six months
- The letters include a warning about the impact of inflation and will be sent direct to both non-advised and advised consumers
- The changes are being introduced as part of wider efforts to encourage greater levels of long-term investing in the UK
Tom Selby, head of retirement policy at AJ Bell, comments:
“The FCA has identified almost 10 million Brits with £10,000 or more in investable assets currently sat mostly in cash, a figure that has increased by over a million since 2020. Given the high interest environment we are currently experiencing, it would be no surprise if more people pivot their investments to cash or cash-like investments in the short term.
“However, over the long term investing large chunks of your pension in cash leaves you exposed to substantial inflation risk. A balanced, diversified portfolio of investments aligned to your risk appetite and long-term goals gives you the opportunity to at least keep pace with, and ideally beat, inflation. Of course, investment returns are never guaranteed and the value of your investments can go down as well as up.
“The aim of the FCA’s non-workplace pensions reforms is to provide a simple ‘default’ investment option to new non-workplace pension savers and encourage existing savers with large chunks of their portfolio invested in cash or cash-like instruments to consider whether this is an appropriate long-term approach.
“Unlike automatic enrolment, customers will need to make an active choice to invest in the default. It is important investors understand the very nature of defaults – where the exact same fund is offered to everyone regardless of their personal circumstances or risk appetite – means they will not be a perfect solution for everyone. Non-workplace customers who prefer to choose their own investments will still be able to do this.
“Similarly, while having lots of your fund in cash for the long term is unlikely to be a sensible strategy, savers who choose to ignore the warnings, perhaps because the returns on cash remain high, will be free to do so.”
Non-workplace pensions reforms Q&A
Will my money be automatically placed in the default investment if I do nothing?
No. Non-workplace pension providers will be required to offer you a default fund, but it will be up to each investor to decide whether they choose it or opt to build their own portfolio of investments.
Will the default fund be ‘lifestyled’?
It will be up to your provider to decide the investment approach of the default fund, but ‘lifestyling’ – where your asset allocation changes as you approach your chosen retirement date – has not been mandated. AJ Bell customers, for example, will be offered a ‘Pension Builder’ fund which does not have lifestyling baked in.
How much will the default investment cost?
This will vary from provider-to-provider. Although the FCA has not capped charges in non-workplace pensions defaults, it will be keeping a close eye on the market as it develops. AJ Bell’s default investment option, the Pension Builder, has an OCF of 0.31% per year.
When will I receive a cash warning – and should I act on it?
Providers will be 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. 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 over the 25% threshold.
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. The normal minimum pension age is currently 55 but due to rise to 57 in 2028.
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.
However, it will remain up to you to decide whether you want to adjust your investment approach after receiving a warning letter.
