New rules are being introduced to ensure investors with self-invested personal pensions (SIPP) or private pensions outside the workplace don’t leave too much money in cash.
It comes as the Financial Conduct Authority (FCA) identified 10 million Brits with £10,000 or more in investable assets that are sat mostly in cash, which means returns can easily be reduced by inflation.
The City watchdog believes this is a risk for savers and investors with their own pension outside workplace schemes.
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Unlike under auto-enrolment rules, there is no automatic fund that these investors can put their money in and it is instead left to them.
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From December, SIPP and other personal pension providers will have to offer “default” investments to their users.
Additionally, savers will be sent warning letters if they hold 25% or more of their pension in cash or cash-like investments for more than six months.
The letters will highlight the impact of inflation and will be sent to customers with and without advisers.
What will the changes mean for pension savers?
Auto-enrolment has helped ensure millions of people start putting money away for their retirement.
Workers are placed into default schemes that typically invest their money in a balanced or cautiously managed fund, although there is an option to change this and select other strategies.
In contrast, if you have a SIPP or personal pension, you won’t be offered these options.
That does give you the freedom to choose your own stocks and funds to back for your retirement, but the regulator is concerned that people won’t invest for the long-term, which could impact the eventual size of your retirement pot.
Some may even be tempted by the high returns offered by cash savings while interest rates are high.
“Over the long-term investing large chunks of your pension in cash leaves you exposed to substantial inflation risk,” says Tom Selby, head of retirement policy at AJ Bell.
“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.”
What will a default pension option look like?
The FCA hasn’t been specific on what a default option should look like but says it must reflect the characteristics and needs of the consumer, manage risks while seeking growth and be competitively priced.
Providers also have to consider new consumer duty rules when designing and selling products to ensure they meet a saver or investor’s needs.
The option may end up similar to the default funds offered in workplace pensions, but you will be able to reject the offer.
“Unlike automatic enrolment, customers will need to make an active choice to invest in the default,” adds Selby.
“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.”
