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Critical decisions to be made over income drawdown

Some pension experts are warning of yet another glitch in income drawdown.

The latest doubt is another spin on critical yields. In the past six months, some gurus have warned that high upfront commission could mean critical yields of 14 per cent or higher will be needed to ensure that the client is not worse off than if they had taken an annuity.

That is worrying in itself. But now it emerges that there is no standard for calculating critical yields, raising the threat that IFAs could be unwittingly giving misleading advice.

At present, there is no requirement under disclosure rules for life offices to highlight the critical yield – some major players in the income-drawdown market do not even use the term. All the PIA demands is an effective comparison between the income that a client could have received from an annuity and income under drawdown.

That sounds fine in practice but, and this is the further tricky part, which annuity rate do you choose? If IFAs are offering clients open-market options or the clients are considering a joint or single life annuity, the projected income figure will be very different. Some life offices, such as M&G, are calling on the PIA to come up with a standard definition of critical yield. That would surely be a step forward.

Doubts about the complexities of income drawdown have led to pressure for it to be made a permitted activity. It has been called the next possible misselling scandal. Is this hype? Not really – look at the number of concerns being raised by product providers. To be fair to the PIA, it is reviewing the market but action is needed and now.

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