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COBS 19.7 Retirement risk warnings1

Definitions

COBS 19.7.1R

In this section:

  1. (1)

    [deleted]2

  2. (2)

    “pension decumulation product” is a product used to access pension savings and includes:2

    1. (a)

      a facility to enable a retail client to make an uncrystallised funds pension lump sum payment; 2

    2. (b)

      an option to take a small lump sum payment; 2

    3. (c)

      a drawdown pension; and2

    4. (d)

      a pension annuity; 2

  3. (3)

    “pension savings” is the proceeds of the client's personal pension scheme, stakeholder pension scheme, or occupational pension scheme;

  4. (4)

    “retirement risk warnings” are the warnings required to be given to a retail client at step 3 of the process specified in this section;

  5. (5)

    “risk factors” are the attributes, characteristics, external factors or other variables that increase the risk associated with a retail client's decision to access their pension savings using a pension decumulation product;

  6. (6)

    “signpost” is the written or oral statement encouraging a retail client to use pensions guidance or to take regulated advice to understand their options at retirement which is at step 1 of the process specified in this section.

Application

COBS 19.7.2R

This section applies to a firm communicating with a retail client in relation to accessing their pension savings using a pension decumulation product.

COBS 19.7.3R

This section does not apply:

  1. (1)

    to a firm giving regulated advice to a retail client on options to access their pension savings;

  2. (2)

    if the firm has already provided the retirement risk warnings to the retail client in relation to their decision to access their pension savings and the firm has reasonable grounds to believe that the retirement risk warnings are still appropriate for the client.

Purpose

COBS 19.7.4G
  1. (1)

    The purpose of this section is to ensure that a firm, which is communicating with a retail client about a pension decumulation product, gives appropriate retirement risk warnings at the point when the retail client has decided how to access their pension savings.

  2. (2)

    If the retail client has not yet decided what to do,2 the firm should consider whether it is required to signpost the pensions guidance under COBS 19.4.16R2 (signposting pensions guidance) and whether it may be appropriate to provide information about the risks associated with the client’s options to access their pension savings generally2.

    2
COBS 19.7.5G

This section amplifies Principles 6 and 7, but does not exhaust or restrict what they require. A firm will, in any event, need to ensure that its sales processes are consistent with the Principles and other rules.

COBS 19.7.6G

An illustration of the steps a firm is required to take is set out in COBS 19 Annex 1G.

Trigger: when does a firm have to follow the steps?

COBS 19.7.7R

A firm must follow the steps specified in this section at the point when the retail client has decided (in principle) to take one of the following actions (and before the action is concluded):

  1. (1)

    buy a pension decumulation product; or

  2. (2)

    vary their personal pension scheme, stakeholder pension scheme, FSAVC, retirement annuity contract or pension buy-out contract to enable the client to:

    1. (a)

      access pension savings using a drawdown pension; or

    2. (b)

      elect to make one-off, regular or ad-hoc uncrystallised funds pension lump sum payments2; or

  3. (3)

    receive a one-off, regular or ad-hoc uncrystallised funds pension lump sum payment2; or

  4. (4)

    access their pension savings using a drawdown pension; or2

  5. (5)

    withdraw the funds in full from their pension savings, reducing the value of their rights to zero.2

Step 1: determine whether the client has received guidance or regulated advice

COBS 19.7.8R
  1. (1)

    The first step is to ask the retail client whether they have received pensions guidance or regulated advice:

    1. (a)

      if the client says that they have, the firm must proceed to step 2; or

    2. (b)

      if the client says that they have not or is unsure, the firm must explain that the decision to access pension savings is an important one and encourage the retail client to use pensions guidance or to take regulated advice to understand their options at retirement.

  2. (2)

    If, after giving the explanation in COBS 19.7.8R (1)(b), the retail client does not want to access pensions guidance or take regulated advice, the firm must proceed to step 2.

Step 2: identify risk factors

COBS 19.7.9R

Based on how the retail client wants to access their pension savings, at step 2 the firm must ask the client questions to identify whether any risk factors are present, except where COBS 19.7.9AR applies2.

COBS 19.7.9AR

2If the value of the retail client’s pension savings is £10,000 or less and there are no safeguarded benefits, the firm:

  1. (1)

    is not required to ask questions to identify whether any risk factors are present; and

  2. (2)

    must prepare appropriate retirement risk warnings based on the risk factors relevant to each pension decumulation product it offers to enable retail clients to access their pension savings.

COBS 19.7.9BR

2A firm may ask the client the questions required by COBS 19.7.9R before the client has decided (in principle) to take one of the actions specified in COBS 19.7.7R to access their pension savings.

COBS 19.7.9CR

2If, to complete step 2, a firm relies on information gathered prior to the client’s decision to access their pension savings, the firm must be satisfied that this information is relevant, accurate and up-to-date before giving the risk warnings at step 3.

COBS 19.7.10R

A firm must prepare the questions required by COBS 19.7.9 R before taking the steps for the first time, and must keep the questions up to date.

COBS 19.7.11G

To prepare for step 2, the firm should:

  1. (1)

    identify the main risk factors relevant to each pension decumulation product it offers to enable retail clients to access their pension savings; and

  2. (2)

    prepare questions to enable it to identify the presence of those risk factors for different retail clients.

COBS 19.7.12G

Examples of the sorts of risk factors which relate to pension decumulation products are:

  1. (1)

    the client's state of health;

  2. (2)

    loss of any guarantees;

  3. (3)

    whether the client has a partner or dependants;

  4. (4)

    inflation;

  5. (5)

    whether the client has shopped around;

  6. (6)

    sustainability of income in retirement;

  7. (7)

    tax implications;

  8. (8)

    charges (if a client intends to invest their pension savings);

  9. (9)

    impact on means-tested benefits;

  10. (10)

    debt; and

  11. (11)

    investment scams.

Step 3: provide appropriate retirement risk warnings

COBS 19.7.13R

At step 3:2

  1. (1)

    if the value of the retail client's pension savings is £10,000 or less and there are no safeguarded benefits, based on how the retail client wants to access their pension savings, a firm must give the client the appropriate retirement risk warnings prepared under COBS 19.7.9AR(2); and 2

  2. (2)

    in all other cases, a firm must give the retail client appropriate retirement risk warnings in response to the client's answers to the firm's questions.2

COBS 19.7.14R

A firm must prepare the retirement risk warnings required by COBS 19.7.13 R in good time before taking the steps for the first time, and must keep them up to date.

COBS 19.7.15G

If after considering the retail client's answers it is unclear whether a risk factor is present, a firm should give the client the appropriate retirement risk warning.

Communicating the signpost and retirement risk warning

COBS 19.7.16R

When communicating the signpost and retirement risk warnings, the firm must do so clearly and prominently.

COBS 19.7.17R

Whatever the means of communication, the firm must ensure that the retail client cannot progress to the next stage of the sale unless the relevant signpost or retirement risk warning has been communicated to the client.

COBS 19.7.18G

For an internet sale, a firm should display the required information on a screen which the retail client must access and acknowledge as part of the sales process. It would not be sufficient for the information to be accessible only by giving the client the option to click on a link or download a document.

Record keeping

COBS 19.7.19R

Firms must record whether the retail client has received:

  1. (1)

    the retirement risk warnings at step 3 of the process specified in this section;

  2. (2)

    regulated advice; and

  3. (3)

    pensions guidance.