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FSA right to get proactive on drawdown

We should not be surprised that the FSA has put income drawdown on its radar. After all, it is no longer a niche retirement option for the super-rich. The fact that people are no longer obliged to buy an annuity has put paid to that and the new rules have changed retirement planning forever.

It was 10 years ago this week that I wrote an article in The Sunday Telegraph lamenting income drawdown’s sixth birthday, because one in two people who had taken out drawdown plans had opted to take the maximum income allowed.

I wrote at the time: “There are fears that drawdown investors will suffer from the double whammy of sliding gilt yields and plunging stockmarkets. This could mean hundreds of investors who elected to take the maximum possible income will have suffered cuts in both income and fund values of up to 30 per cent.”

Even then, pundits were describing drawdown plans as the next misselling scandal. The irony will not be lost on many that the same paragraph could be written today.

Such fears were heightened then by the Equitable Life debacle, which saw 15,000 policyholders put in drawdown, even though the plans were unsuitable for many. The beleaguered life insurer set aside £200m to cover a potential liability.

You may not believe it but drawdown is not a new phrase on the hit list of the City regulator. In 2001, the FSA was also in the process of investigating the sale of existing drawdown plans.

It published guidance notes to advisers reiterating that drawdown comprised various disadvantages that make it appropriate for only a minority of clients. Those who criticise the regulator’s latest move should ask themselves whether they are among those who have criticised it for being reactive rather than proactive in the past.

Many, myself included, have been quick to chastise the regulator for failing to spot the banking crisis and the endowment, pension and split-cap misselling scandals before the damage had been done. Perhaps if the FSA had its eye on the ball, such scandals could have been avoided.

Today, the consumer press is busy writing about the plight of would-be pensioners. The dramatic fall in annuity rates, the closure of final salary schemes, the prospect of inflation not to mention volatile stockmarkets has given retirees plenty to think about when they stop working.

Retirement is no longer waving goodbye to colleagues on your 65th birthday and making the most of the next decade before you wave goodbye to the world.

This is the reason why income drawdown is back in the headlines.

Of course, pension legislation changes will also have an impact on financial advisers and they have my sympathy. Not only do IFAs have their work cut out to help clients build a tidy nest egg in the first place but they now also have an increasing number of options to choose from when their clients come to retire. Making the wrong choices for their clients could have serious ramifications.

Those IFAs who argue that the FSA has bigger fish to fry than targeting a relatively small number of advisers have a point but that does not mean the regulator should not be scrutinising an area of retirement that will only grow in popularity.

I say it is better to ruffle a few feathers now than deal with a major fallout in a decade’s time. Perhaps we should applaud the FSA for finally recognising that prevention is better than cure.

Paul Farrow is personal finance editor at the Telegraph Media Group

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. There is a wdiely held perception amongst retirees that drawdown is the only positive option at retirement. I have lost count of the number of times I have encountered potential clients who open with the statement, ” I want to find the best drawdown plan for my pension”.

    On further discussion, the reasons for this vary from the bullish (I want to get get as much cash out of my pension as quickly as possible) to the questionable (All of my friends have one so I must have one too)!

    Whilst the majority do accept that one of the alternatives are more appropriate, there are still those who decide to find an adviser who is willing to proceed with the purchase regardless.

    I feel the majority of advisers have nothing to fear as they only recommend drawdown when appropriate, however certain organisations may their “advice?” under close scrutiny.

  2. I agree totally and have been saying for a long time that Draw Down had massive potential for a mis-selling scandal. I think Drawdown explained and sold properly is a very good product to be able to offer in a professional advisers armoury. The problem I have is I have come across clients that I have taken on that have not understood the risks completely, risk profile too low, not had explained Mortality Drag and Mortality Gain. I am a great believer in Draw Down and there is a place for it most definiately but lets get it right

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