Cash warnings will be sent irrespective if the customer is an advised or non-advised client.    

Providers will need to assess the members of NWP pensions at least once every three months to assess whether they held significant cash holdings over the previous six months. 

What is a significant cash holding?

A significant cash holding is deemed to be cash or cash like assets that meet the following conditions:

• More than 25 per cent of their NWP is invested in cash, excluding cash held for lifestyling purposes.
• The amount of cash is more than £1,000. 
• The above two conditions have been met in all other assessments carried out during the preceding six months. 
• The consumer is more than five years away from normal minimum pension age (currently 55) or a protected pension age if that is lower.

Customers that meet these criteria must be sent a cash warning. The cash warning must: 

• inform the customer that more than a quarter of their NWP assets is invested in cash or investments that are similar to cash; 
• say that their NWP is at risk of being eroded by inflation;
• include a generic illustration that clearly shows how erosion by inflation would affect a £10,000 pot over 10 years, assuming 0 per cent interest and using CPI; and
• inform the customer that they should consider whether their current investments are likely to grow sufficiently to meet their objectives. 

The generic illustration can either be visual or a text explanation, but visual would be preferred. 

What providers also need to do

Providers will also need to: 

• explain in plain language or illustrate that different types of investment have a different balance of risk relative to potential gain;
• inform the customer that the provider offers other investments including the default option, where the provider offers one, and the customer is not an advised customer; and
• make clear the warning is not advice and that the value of investments can fall as well as rise.

In our view, providing a cash warning as envisaged in our rules and guidance does.

Providers are also given the option to inform advised customers about their default option if they have one, which is one reason why advisers need to be aware of these new rules. 

Providers have up to three months after the date of the assessment to issue the cash warning. Once an initial cash warning has been sent it only needs to be sent again 12 months later if the customer continues to hold significant cash assets, and annually thereafter if they still meet the criteria.  

There is no need for customers to acknowledge or take action on the cash warnings they receive. 

Why are cash warnings important?  

For many NWP consumers, being invested in assets that aim to provide growth will be crucial to making sure they can meet their long-term objectives. 

The cumulative impact of being invested in growth investments rather than in cash or cash-like assets can be very significant over the long term. 

For example, the FCA calculated that over a 20-year period, assuming 5 per cent annual return on growth assets and 1 per cent on cash like assets:

• a customer making regular contributions into their NWP could have a pension pot at least 55 per cent larger by investing in growth assets; and
• a customer making a single initial contribution with no further contributions could have a pension pot that is at least 115 per cent larger.

Richard Cooper is business development manager at the London Institute of Banking & Finance