The Financial Conduct Authority (FCA) is encouraging the government to consider decoupling tax-free cash from the decision to enter drawdown or buy an annuity. 

In its  tax-free cash from other pension decisions to benefit consumers.

The recommendation is in response to the current system whereby pension members seek to access their 25% tax-free cash and do not consider their options with the remaining 75% of their savings. ‘We are concerned that this is contributing to the lack of competitive pressure on providers and means consumers are not engaging in their investment decision,' the regulator said.

The FCA’s review suggested that separating the option to take tax-free cash from other decisions on what to do with the remaining funds, will encourage members to make engaged drawdown decisions.

If this is introduced, members’ funds could remain in their existing accumulation scheme until they are prepared to engage with the rest of their savings. Members would be able to decide on how they want to take the rest of their retirement income at a later stage, after taking tax-free cash.   

‘We recognise there are detailed policy and practical issues which the government would need to consider. We will provide HM Treasury with the information we gathered and our analysis of why we believe ‘coupling’ might lead to consumer harm to aid their consideration,’ the FCA explained.

Commentators raised concerns about the regulator's proposal. Old Mutual Wealth pensions expert Ian Browne said: ‘While the rationale is understandable, such decoupling would be complex to administer and also risks adding even more complexity to an already intricate pension tax system. For instance, decoupling would require ring-fencing pension fund rights. Instead of adding more rules, product innovation could achieve the same goal.’

Aegon pensions director Steven Cameron added: ‘The concept of "decoupling" tax free cash from transferring into drawdown was always going to be challenging within tax rules and would have required complex administration and ongoing record keeping. Making it "too easy" to take tax free cash early could also have encouraged more people to take this earlier than needed, leaving less funds to cover retirement.’