Income drawdown is often complex and is an advice-dependent product that generates comparatively high commission levels and entails clients accepting a level of risk into older age.
Recent years have seen claims over drawdown misselling. In October 2006, the FSA censured GD Tancred Financial Services for not clearly explaining and documenting the risks of income withdrawal to customers with small pension pots of less than £100,000.
In the same month, Rowanmoor Pensions warned that advisers could leave themselves at risk by encouraging clients to withdraw what could prove to be unsustainable income.
The firm flagged up that many clients wanted to take too much income in the early days, causing problems later on. It reminded advisers it was essential for clients to have a sustainable level of income for a full retirement.
Drawdown was at least part of the problems that led to the unravelling of AWD Chase de Vere last year. In November 2008, the FSA fined the company £1.12m for serious failings in its pension transfer, pension annuity and income withdrawal business that resulted in misselling.
Also late last year, at the Personal Finance Society’s annual conference, actuarial experts added their voices to those warning of misselling risks on drawdown products.
Adrian Waddingham, who is a partner at actuarial and consulting firm Barnett Waddingham and an actuary who has been an expert witness in court cases relating to income drawdown, told the PFS conference he had already seen some claims for drawdown misselling and predicted more could come in the wake of stockmarket turbulence.
He also warned of speculative lawyers and of the possibility of clients putting forward limited investment sophistication when pursuing legal action over misselling.
However, many providers believe there is no storm coming over drawdown.
Prudential head of business development Vince Smith-Hughes says: “The advantages and disadvantages of income drawdown have been well known for a long time, so I would be surprised if there was widespread misselling. Also, key features documents are much better than they were five years ago.”
Smith-Hughes also points out how useful drawdown has been for people retiring in today’s market as it gives the option to stay invested to avoid crystallising and locking in stockmarket losses by buying an annuity now.
One of the areas where advisers could potentially be most vulnerable is where they have encouraged clients to withdraw the maximum income but, again, leading experts are adamant that advisers are managing this type of drawdown risk effectively.
Winterthur Life head of pensions development Mike Morrison says: “I know lots of advisers that encourage clients very much not to take the maximum. However, in cases where they do take the maximum, you need to look at the other assets the client has – they might have something else they can live on.
“I think advisers have generally got drawdown right , including the assessments of clients’ attitude to risk. I would like to think advisers have been pretty good on this.”
Specialist firm Rockingham Retirement says it operates a conservative rule of thumb when it comes to investing into retirement – including not recommending more than 20 per cent of the drawdown pot is invested in equities, with a tendency to favour lower-risk funds.
However, managing director Steve Hunt is concerned that major misselling problems over not just drawdown but also retirement income planning more broadly could be about to break.
He says: “There have been mutterings that now the endowment misselling run is closed, ambulance-chasers are looking at drawdown and annuities, particularly where individuals have defaulted to a mainstream annuity when they could have secured a much better rate by qualifying for an enhanced rate impaired life annuity.”
Hunt also hints that a number of online domain names pertaining to annuity misselling have already been bought up by speculative firms.
In terms of advisers positioning themselves out of the path of any income drawdown misselling storm, Waddingham’s 2008 presentation to the PFS highlighted a range of risk hot spots, including the failure to undertake a full fact-find, omission of proper transfer analysis, misreading clients’ attitude to risk, lack of clear reasons why, failing to cover the alternatives and clients drawing an unsustainable income.
Looking at the AWD Chase de Vere case, the FSA found the firm missold some pension transfers and annuities by recommending products to clients who already had adequate existing pension provisions or whose attitude to risk did not match the products recommended.
The FSA also found that the firm sometimes failed to properly disclose the risks and costs of the products it recommended and was also unable to demonstrate the suitability of its advice.
There are clear lessons here for advisers on taking additional time and care when generating suitability trails whenever they recommend drawdown and other alternative pension arrangements.