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Categories:Pensions

Partnership warns Treasury of capped drawdown risk

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Partnership has warned the Treasury there is a significant risk that large numbers of people in capped drawdown will exhaust their pension funds prematurely.

Under the capped drawdown regime, which came into force in April, the need to annuitise at 75 or move into alternatively secured pension was scrapped while the maximum amount of pension income allowed was reduced from 120 per cent of GAD rates to 100 per cent.

Partnership has submitted a range of calculations to the Treasury, suggesting people will run out of funds if they draw down the maximum each year. It calculates someone taking 100 per cent income a year from age 60 has a 40 per cent chance of depleting their fund by 85.

Chief executive Steve Groves says: “This is a big issue because it goes to the heart of confidence in public saving. If a significant proportion of people start running out of money because they have drawn what the Government suggested was a safe level of income, they or their children will challenge the advice that was given.”

A Treasury spokesman says: “In designing the new rules the Government has had to strike a balance between allowing greater flexibility and limiting individual risk.”

MGM Advantage pensions technical manager Andrew Tully says: “Drawdown is riskier as people get older. The worry is that some people are just wandering along without really thinking about it.”

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Readers' comments (7)

  • I doubt that they are wandering along without thinking about this. Almost all of these clients are advised, so their adviser will warn them if they are straying off track. Their adviser will also be making sure that their funds don't run out prematurely.

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  • Not losing out on potential annuity business I hope..........................?

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  • Isn't this what GAD rates and regular income reviews are there to stop? Are Partnership and MGM saying it's better to lock into an annuity on all time historically poor terms? Or is their concern that advisers won't manage clients drawdown funds properly? Do they sell annuities by any chance?

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  • But it was even worse when 120% was allowed. Seems like a hollow peace of reseasch, and in any case hardly anybody will switch it onto the maximum. Those people will have been advised to buy a annuity.

    I see that Partnership aren't in the Drawdown market, only annuities!

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  • Anon 2.36, what world are you living in?

    Clients have been sold on the 'annuities are rubbish' idea and think that they should stay in drawdown for ever. The danger for IFAs is that they don't contradict this thinking. By age 80 the mortality drag will be more than 4% ... and rising!

    Cynic Al, Do you know how to manage a fund for returns in excess of 10% p.a.?

    Oh .... and in case you wondered Intelligent Pensions is not an annuity provider, but an IFA with several hundred clients in drawdown; an IFA that is very well aware of the importance of the annuity as part of the retirement income solution!

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  • I agree with David Trenner.

    Annuities are good for those who who wish security in retirement, and a great many still do.

    For those with a greater degree of acceptance of risk, or those who want to take advantage of flexible death benefits, there is the option of capped / flexible drawdown.

    As always, good financial advice when taking benefits, and continuing advice if you elect for drawdown, is crucial.

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  • has any body woken up to 3rd way yet? a drawdown with a guarantee that you cant run out of money.... upside of drawdown funds liquidity etc...

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