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Drawing attention to drawdown drawbacks

There is and has been a lot going on in the pension world, what with stakeholder, pensions and divorce and a multitude of other issues.

As usual, income drawdown is one of the hot topics with a number of recent headlines reading, Mugged on the way to retirement, Seventy per cent of drawdown plans may have been missold, When drawdown has a downside… On closer reading, many of the problems appear to have been caused by individuals entering drawdown and not being fully aware of the risks they are taking on.

These problems are compounded as maximum income is taken and investment performance has meant a lower income is available than the annuity that could originally have been bought.

If we add to this the comments made by the PIA in Regulatory Update 67 where records kept by advisers on income drawdown cases were questioned. It was suggested that they could not say whether advice given was good or bad because the records kept were sub-standard. Surely we must welcome the forthcoming FSA report discussing the possibility of income drawdown becoming a regulated “permitted activity”?

We have long been advocates of such a move. The whole area of “retirement options” is complicated and there are risks that need to be understood and explained.

It is suggested that G60 may provide the solution, in that it will be split into two to cover this. This may be the answer but it is important to note that to advise on retirement planning and options will need a detailed knowledge of pensions, financial planning and, importantly, investment. The real challenge will be if this can be accommodated in one exam.

It will also be important to include all options including annuities. Recommending annuity purchase because income drawdown is too complex must not become an option. If there is a regulatory regime then only those authorised should be able to recommend annuity purchase. The big problem may be in defining when and how such a regime should take effect.

This brings us back to another old favourite. The need to buy an annuity by the age of 75. It has gone quiet on this issue recently but it is still vitally important.

Much has been written about the falling supply of gilts and the likely effects on annuity rates.

The Retirement Income Working Party reported in March and the Social Market Foundation later in the year. The arguments have been put forward but nothing appears to be moving.

In the meantime, a large number of individuals are having to “spend” their hard earned and carefully managed pension funds on a fixed-price income over which they have no control. Not only that, but they are also handing over control over their capital to the extent that it may be the insurance company that benefits on death rather than chosen beneficiaries.

If we are about to set up a regulated regime then surely now is the ideal time to revisit the issue of compulsory annuity purchase.

It is accepted that income drawdown is not for everyone. The rather rigid and outdated annuity regime that we have may have meant that some people have gone into drawdown when they should not have. But surely for those for whom it is right, why should they have to stop?

It does seem somewhat strange that we are in a situation where the Government is hoping to encourage more people to start saving into a pension when ultimately purchases made at retirement will be perceived as a poor value investment.

Surely this will prevent at least some people from even starting.


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