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The middle ground

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Billy Burrows Partner, Burrows & Cummins

The new rules for pension drawdown have come into effect and the new flexibility, combined with more low-cost drawdown plans and better inv-estment options, will change attitudes to drawdown.

While flexible drawdown may take all the headlines, it will have limited impact on the retirement market because only a small number of people will have a pension fund big enough to benefit from this option. Capped drawdown will have a much bigger impact on the market because it will appeal to many more people.

Seen through the eyes of many middle Britain clients approaching retirement, capped drawdown may have many advantages, especially as this cohort is seeing the value from annuities decreasing and therefore need to seriously consider alternatives to annuities.

Annuities are becoming relatively more expensive for middle Britain as a damaging cocktail of postcode annuity pricing, Solvency II and gender-neutral annuities create a downward drag on annuity prices. I have long argued that the only way that middle Britain investors will get better value from their pensions is by taking or shar-ing some risk with the comp-anies paying their pensions.

There are three reasons why drawdown is generally regarded as unsuitable for those with modest pension funds. Drawdown is inherently more risky than an annuity, the charges are much higher and drawdown needs complex advice.

The key to success or failure with drawdown is the investment strategy and the problem is that most investors do not have access to the appropriate investment advice. The rise in popularity of multi-asset funds provides a potential solution because they can select a combination of portfolios that provides a diverse spread of investments with the appropriate level of risk.

There is no escaping that drawdown needs advice but this advice does not have to be overly complicated or expensive if the advisers use a combination of good communications and efficient use of technology.

Provided investors understand the risks of drawdown and make sensible investment decisions, there is no reason why capped drawdown should not be a viable option for investors seeking long-term income growth with income flexibility and choice of death benefits.

However, there are two downsides. First, investors are still left with the problem that as they get older they should be taking less risk, so investing in annuities as they get older is always a good idea. Second, the 55 per cent tax on lump-sum death benefits means that pensions are not an efficient way to leave money to the family.

My message is consistent. Clients should not necessarily be faced with a black and white decision but with the choice of a combination of guaranteed and investment-linked options.

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