As drawdown sales continue to grow, advisers are looking for new ways to ensure their clients’ withdrawal strategies are sustainable.
Advisers and regulators frequently point out the dangers clients face from taking money out of their pots too quickly and having the wrong investments when there is a market downturn.
Thirty per cent of pots accessed for the first time since October 2015 have gone into drawdown, compared with the 12 per cent taken as an annuity.
The FCA has expressed concerns over the number of people unwilling to pay for advice, with more than 30 per cent of drawdown sales occurring on a non-advised basis.
Small pots may go unadvised due to the cost of advice, but can be most vulnerable to sequence and longevity risk.
Providers including Scottish Widows, which launched a new service this week, are trying to help advisers with drawdown and prevent clients from running out of money. But the market remains divided on who should take responsibility for solving the sustainable drawdown dilemma.
Taking a holistic view
Peter Stewart Associates director Michael Brown works at a firm that advises both individual and corporate clients. He notes that drawdown is an opportunity, yet it comes with significant risk as each client needs to have their attitude to investment risk and portfolio reviewed every year.
Brown says: “We use a combination of FCA expectations, common sense, high principles and cashflow modelling to ensure our clients end up in the right place. If drawdown is not appropriate for a client, we don’t advise them to do it.”
Regarding the problem of non-advised drawdown and persuading more people to see an IFA, Brown says employers have a prominent role to play.
He continues: “From my perspective the most efficient way to solve this problem is to get the employer to pay for meetings with IFAs. The beauty here is IFAs can talk with people about their options including drawdown. I do a lot of corporate counselling and most of the companies respond well to it, as do their employees.”
Plutus Wealth Management chartered financial planner Sebastian Hurst says he understands the merit of broadening access to advice through the employer but is sceptical most will be able to dedicate enough time to finding the right advice solution.
He adds: “It is a good approach [through the employer] but someone has got to pay for it and that is always the problem. Any IFA will help a client, but the client has to be willing to engage with their pension and pay for advice as there a lot of risk for the IFA to advise on drawdown.”
Employers taking the lead
Schemes or employers do have a role to play in educating workers about drawdown, however. During a seminar in London last week, consultants Aon looked at what products and support are needed for clients in drawdown to combat both over-zealous and over-cautious withdrawal strategies.
Its research shows most schemes allow members to “fall” into their current provider’s solution.
Aon’s defined contribution member survey in 2016 asked members what source of advice or guidance they were most likely to use to help them make decisions about their pension savings in the future.
Fourteen per cent said they were most likely to use an IFA and 23 per cent said they would use their employer’s pension scheme.
Seventeen per cent said they would make the decision themselves and 10 per cent would look to family or friends.
Aon defined contribution proposition leader Debbie Falvey said: “There are practical considerations with supporting clients in drawdown. As people get older they become more cautious than maybe they need to be.
“Furthermore, even if everybody turned around and said they wanted an IFA there would not be enough of them. One would hope schemes and employers step into the breach but many fear being sued.
“The fear of guiding people to drawdown needs to be addressed. There is a risk of doing something but also not doing something.”
According to Aon there are four components of a solid drawdown solution for clients: sustainable income, managing longevity risk, flexibility and supporting clients as they make their decisions.
Aon partner and head of DC consulting Sophia Singleton said many platforms on the retail side do not provide investors with a comprehensive drawdown solution.
“These platforms have only got one of the four key components for a sustainable drawdown solution and that is sustainable income.
“This is not enough and it is not realistic to expect the majority of people to engage with pensions through IFAs. Therefore a default solution like a collective DC scheme is a really good idea.”
Although advisers are not able to plug the drawdown gap themselves they are still an important part of the solution alongside providers.
Suffolk Life pensions technical manager Jessica List says: “Drawdown can be seen as a product in itself when it is really a feature of retirement. Once you have gone into drawdown it is not irreversible.
“You can still change investment solutions, withdrawal rate, switch provider and get an annuity. Clients should be reminded of this.”