Flexibility factors

Ray Chinn, Head of pensions, LV=
Ray Chinn, Head of pensions, LV=

LV=’s Ray Chin and Scottish Life’s Fiona Tait go head to head on the Government’s new drawdown rules

In July 2010, when the consultation on ending compulsory annuitisation introduced the concept of flexible drawdown, I was sceptical. Who will offer a product where the customer can take all of their money out on day one? What about people blowing their hard-saved pension funds in the casino at Monte Carlo or Blackpool for smaller funds?

Since then, I have spent more time thinking about flexible drawdown from the customer perspective and become a real fan.

Some people might want to strip out large sums from their pension using flexible drawdown but they are more likely to be people with very large funds (and other assets) who can afford to do this and those with small residual funds after securing the MIR, where some extra “cash” would come in very handy.

I see the real market as those customers with residual funds (after securing MIR) in the £100,000 to £500,000 region. They will value the flexibility of being able to take money from their pension fund in the most tax-efficient manner I have spent more time thinking about flexible drawdown from the cust-omer perspec-tive and become a real fan

possible, using the income to take them up to the higher-rate tax threshold but not beyond. They may also value the ability to keep as much of their pension fund uncrystallised as possible – to avoid the new 55 per cent tax charge on lump-sum death benefits – using flexible drawdown on a “phased” basis to crystallise as little as possible.

I have spent more time thinking about flexible drawdown from the customer perspective and become a real fan

Having spent time looking at these opportunities, talking to advisers and considering the bigger picture – as highlighted in the HMT consultation, flexible drawdown will provide greater flexibility in some circumstances and remove a perceived barrier to wider pension saving – then I despair somewhat when providers suggest flexible drawdown is a “bad thing”.

Sure, product design needs to be carefully thought through, sure, timescales have been tight and we have not got total clarity on the rules yet. But what we do have is a great opportunity to innovate and build propositions that truly meet customer needs.

LV= will be offering the ability to access flexible drawdown via our protected retirement plan this month. We will set out clearly the type of customer we think might benefit from this approach and work with advisers to ensure everything is understood. We will use this experience to inform wider product development – including a flexible drawdown option via our flexible transitions account (Sipp) later in the year. We will not spurn this opportunity and claim that it is all happening too fast or that it all too dangerous. Darwin is quoted as saying, it’s not the strongest or the most intelligent that survive but those most able to deal with change.

We hope that advisers will see the benefits of this change.

Fiona Tait, Business development manager, Scottish Life
Fiona Tait, Business development manager, Scottish Life

New legislation will allow pensioners to enter a flexible drawdown plan from April 6. However, providers do not have any obligation to offer a product to deliver it. The ideal scenario would be that providers were able to offer a fully developed product with fully tested systems for advisers and relevant clients to use from day one. There are however a number of reasons why this is unlikely.

Problem one
The new rules also include changes to the maximum income limit under capped drawdown plans (previously unsecured pension). Providers in this market already have customers who will be in capped drawdown contracts from April 6. This means the changes to capped drawdown must take priority. If the provider did not make these changes first, existing customers could be in breach of the legislation. As there are not any flexible drawdown clients yet, this must be a lower priority.

We do not know how clients will use it or what the benefits and/or potential pitfalls will be. We do not even have clarity on legislationThe changes for capped drawdown are more extensive than they might seem at first glance. New GAD tables mean new literature, new projection systems and revised admin systems, all of which must be properly checked. This will use up the resource that might otherwise have been available to build a flexible drawdown plan.

Problem two
Flexible drawdown is a new arrangement, so we don’t know how clients will use it or what the benefits and/or potential pitfalls will be. We do not even have clarity on some areas of the legislation.

We do not know how clients will use it or what the benefits and/or potential pitfalls will be. We do not even have clarity on legislation

When Scottish Life built its unsecured pension facility, income release, we spent over six months researching the market. We carried out client surveys and held discussion workshops. We hosted adviser workshops and carried out one-to-one visits with them to test our proposed solution. And then we did it all again when we updated the annual review procedure. The result was a product which met the requirements of both advisers and their clients.

If we were to create a product without carrying out this sort of research, we would run the risk of it being potentially too uncompetitive to sell and/or too risky to recommend. The FSA quite rightly imposes TCF requirements on providers which require us to identity our target market and ensure that the product we design is suitable for that market.

Problem three
Service is paramount. The product needs to work efficiently. This means we need to both build and test new systems. Scottish Life’s intention is to investigate this new market and to take every step we can to ensure that any product we design is fit for purpose.