Warning over pension savers 'sleepwalking' into low returns

Some pension holders who opt for drawdown -- taking an income from their pension pot while leaving the rest invested, rather than buying an annuity -- are "sleepwalking" into poor financial decisions, a pension expert has warned.

Former pensions minister Steve Webb said that people leaving their money in inappropriate, low-return investments were losing out due to "reckless caution".

The Financial Conduct Authority (FCA) has previously expressed concern about consumers moving into drawdown and holding their funds in investments that will not meet their needs.

Now, the FCA has drawn up new measures to ensure customers are given a clearer set of options for investing their retirement savings.

The regulator is proposing that firms will offer ready-made investment solutions, known as investment pathways, to customers who enter drawdown without taking financial advice. These customers would choose from four objectives for their retirement pot, and be offered a solution based on their choice.

The FCA is also proposing that consumers' pension investments are not defaulted into cash savings unless the customer actively chooses this option.

Steve Webb, who now serves as director of policy at Royal London, commented: "The big outstanding challenge around pension freedoms is not people with large pots blowing the lot on a sports car, but is about more inexperienced investors with smaller pots leaving them invested in cash for long periods of time or withdrawing them altogether.

"These FCA rules are a sensible response to the risk of savers sleepwalking into seeing their hard-earned savings eroded by sitting in low-return cash investments. But there is still a problem where people cash out the whole pot and transfer it into a cash ISA or current account. It is clear that reckless caution, not Lamborghinis, is the big outstanding challenge with pension freedoms."