Posted: 28th April 2017

Since the launch of income drawdown products in 1995, numerous legislative changes have affected the way drawdown products work and are sold.

However, perhaps the biggest change for the industry and consumers alike was George Osborne’s move to allow people to cash in their pension funds, insisting they should be trusted to make the right financial decisions. Consumers have taken advantage of these pension freedoms, with latest figures from HMRC highlighting more than £10bn has been withdrawn from pension pots since their introduction.

What risks has this created for firms, what can they learn from the FCA annuity review, and what should they be doing ahead of the FCA’s review of non-advised drawdown?

Until recently, drawdown products were generally distributed on an advised basis, with firms required to review the suitability and terms of recommended products and the outcomes provided by those recommendations on a regular basis. However, post-pension freedoms, the sales of non-advised drawdown have grown significantly. This has shifted the focus from advice to the adequacy of information provided to customers to ensure they make informed decisions pre and post-sale.

Last year’s thematic review on non-advised annuity sales (TR16 / 7) uncovered some poor practice in the non-advised market, including in relation to meeting customers’ information needs.

The read-across from the Annuities review

The key for firms is their appreciation of the read-across between the results of the Thematic Review into annuities and their non-advised drawdown proposition.

It is crucial that firms satisfy themselves that they are complying with the existing rules. This includes whether they are providing adequate information to enable consumers to make an informed decision, and that their non-advised drawdown customers are receiving fair outcomes given the potential for detriment in this space. The sooner firms can gain a clear view over the outcomes provided by non-advised sales, the sooner they can act if issues exist. If issues do crystallise in the customer base, they can be costly to remediate and of course lead to sub-par outcomes for older consumers, who are arguably the most vulnerable users of financial services products.

With this in mind, what should firms be thinking about now, and which areas present risks which firms must mitigate?

Taking action – five areas for consideration


In the run-up to retirement (at least five years before the client’s chosen date) firms should consider the most appropriate way to educate customers regarding the types of retirement choices they will have and the decision they will need to make. This could begin with general guidance five years prior to retirement, with increasing detail provided as the retirement date draws nearer. However, it’s important that customers aren’t bombarded with complex information months or even weeks before they need to make important decisions – this can cause disengagement and may prevent consumers from choosing the retirement option that will best work for them.


One of the key areas here is ensuring that relevant disclosure is provided. If customers’ information needs are not met there is an increased risk of them receiving poor outcomes. Factors for consideration include product features, charges and risk warnings. Are these appropriate, and does the business review the outcomes provided by the information they send on a regular basis?

Ongoing communication

Customers in drawdown also need to be aware of the need to regularly review their arrangements. Income from their policy can be required for as much as forty years, but funds can be eroded long before then by high withdrawals and poor fund performance. 

As important as it is to communicate in advance of retirement, firms must also consider how they will engage on an ongoing basis afterwards. So for drawdown, communications should inform the customer how their product has performed over the year, but also provide sufficient information about the future outlook to enable consideration of whether the income is sustainable and whether the fund choice remains appropriate. 

Governance and oversight

Processes should provide a good standard of customer outcomes regardless of the distribution channel used, and so principal firms must ensure clear sight of the business being performed by third parties in order to address any issues in the distribution of products.

Call handlers need sufficient knowledge to answer customers’ questions while at the same time ensuring they do not provide advice. Where there is an online process, it is essential that the customer journey is reviewed to ensure that there is a clear process for the delivery of fair outcomes. These reviews should include the use of any risk profiling tools that are used in the process.

Outcomes testing

Outcomes testing is a key tool in demonstrating that customers were fully informed and made sound decisions aided by the firm during the ‘at-retirement’ process.

Firms should seek to engage representative samples of their customers in order to assess whether the process of purchasing a drawdown product and ‘living with’ the product is delivering good outcomes at key points in the customer journey. This may require firms to delve deeper into the customer experience depending on how they are currently approaching their outcomes testing.

By ensuring their ongoing reviews of the customer’s drawdown experience are documented, go into an appropriate amount of detail and are able to be articulated, firms will be able to make measured change for the benefit of customer outcomes while satisfying their regulatory obligations.

Gaining the early advantage

The FCA review into non-advised annuities led the FCA to require some firms to undertake a review of sales – specifically where information was found to be inadequate to enable consumers to make an informed decision.

With the regulator announcing their thematic review will begin in the fourth quarter of 2018, firms reviewing their non-advised drawdown processes now will be in a better place to explain how they ensure good outcomes going forwards. Using the above areas of focus to guide this process will benefit firms, helping them make any necessary changes in a way that is proportionate and protective of customers.

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