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FSA highlights drawdown misselling risks

The FSA has highlighted potential drawdown misselling concerns as tumbling annuity rates and Solvency II push investors towards alternative retirement products.

The regulator’s retail conduct risk outlook, published today, highlights the increased risks facing savers who choose to enter drawdown rather than purchasing an annuity when they retire.

It says: “Traditionally, consumers in then UK have purchased annuities at the point that they reach retirement. However, the Government has now removed the requirement to annuitise pension savings by the age of 75.

“Furthermore, low current gilt yields mean lower annuity rates and Solvency II may further increase the cost of annuities and reduce their attractiveness.

“As such, there is increasing likelihood that alternative forms of decumulation products will become more popular.”

The FSA says investors who move into drawdown risk seeing the capital of their fund eroded, investment returns lower than those shown in illustrations, and lower annuity or scheme pension rates in the future.

The regulator also says high levels of income may not be sustainable when maximum withdrawals are taken under capped drawdown or a when a short-term annuity is purchased.

The FSA says: “These factors increase the potential for misselling income drawdown products, as advisers are likely to need to consider other variables (capacity for loss, risk, higher costs, etc) that are not typically considered when an annuity is purchased.

“Consumers have the potential to suffer detriment if they are sold an income drawdown type product when an annuity would have been more appropriate to their circumstances. This risk has the potential to affect all those people entering retirement in the near future.”


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. Surely any decent adviser is doing a proper comparison already and explaining the possible pitfalls…. aren’t they?… not sure how this is new news….just a reminder?

  2. Andrew Whiteley 13th March 2012 at 1:21 pm

    But how would you know. Whilst the client may have seen a fall in the value of his/her fund there is a chance that they could be hit by a bus the next day, in which case anything other than a joint life annuity could represent incredibly poor value for money.

  3. Sorry – no time to read this got some grandmothers who need training in sucking eggs.

  4. “Consumers have the potential to suffer detriment if they are sold an income drawdown type product when an annuity would have been more appropriate to their circumstances. This risk has the potential to affect all those people entering retirement in the near future.”

    No, really?

    Most of them should thank the bloke who twisted their arms to make provision for retirement.

  5. man on the moon 13th March 2012 at 1:56 pm

    The risks that they highlight have been noted since the days of the PIA.

    Drawdown can still work for some Clients for others it is less attractive with the changes that occurred since 6th April 2011.

    Annuity rates are at all time lows – I wonder who the FSA will blame for this?

    PS here is another Risk Warning to add

    Taking your pension benefits will or may reduce the value of your future pension benefits.

  6. “potential drawdown misselling concerns ”

    Maybe they should have a word with their mates at HMRC who messed around with GAD rates at the same time as reducing the max allowable drawdown from 120% to 100%.

    Many clients who are unfortunate to have a review at the moment are seeing a huge decrease in maximum allowable.

    This, combined with poor investment returns, will surely lead a few to question their IFA’s advice.

  7. Yet another misselling warning. Glad to see the FSA are regulating and protecting the public up to their ususal standard.

  8. The FSAs hould concen themselves with unregulated business. Good example is credit card providers who inform customers of rate rises but don’t explain that they can keep the lower rate if they don’t use the card again. Disgraceful practice from the providrs (virgin as an example) and from the FSA who seem hell bent on bringing down the finan advice industry.

  9. They don’t say?

    Has somebody at the FSA decided to take J05 and suddenly discovered this?

  10. Traditional Income DrawDown is (IMHO) definitely high risk, not to mention expensive, but Fixed Term Annuities with the balance of the fund remaining invested in a cautiously weighted portfolio (forget GMV products) are quite different because there can be no cross-contamination between the income and fund performance.

    So, Mr Client, are you happy to lock in now, for life, to a very low annuity rate (as it happens, I’m seeing one this very afternoon who’s adamant that he is) or, for only a modicum of risk, would you prefer a three year stop-gap strategy in the hope that annuity rates will improve over the coming few years (which they may not) and that along the way your fund will grow ahead of inflation (though nothing can be guaranteed)?

    The choice is fairly simple and products of that type are nothing like as expensive as conventional DrawDown. It just needs to be explained in terms that an ordinary client can understand and appreciate.

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