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Going in blind: Providers navigate the perils of non-advised drawdown

Providers are responding to growing demand from savers for drawdown pension products, but there are fears those who bypass advice could be left exposed.

The Budget has opened up the pensions market at a stroke, turning the tables on annuities as the dominant retirement product and boosting the profile of income drawdown.

Prior to the Chancellor’s Budget statement, pension companies shied away from offering drawdown direct to consumers. The risk of members reacting badly to investment falls or spending cash too quickly without the support of an adviser was deemed too great. Since then more providers have begun to dip their toes into the drawdown market.

The Organisation for Economic Co-operation and Development warned this week the reforms risk consumer detriment. It comes at a time when the restrictions on drawdown have already been partially dismantled, with flexible drawdown now open to anyone with £12,000 of guaranteed income while capped drawdown withdrawals have increased to 150 per cent of the GAD rate before both aspects are removed completely from April.

So could providers’ willingness to serve the new market simply lead to poor customer outcomes?


Last week Royal London said it plans to offer a new non-advised drawdown contract to meet demand. However, the mutual insurer says only “insistent” customers will be given access to drawdown, and even then there will be restrictions on the investments available.

Standard Life is also planning to limit the range of investments open to its non-advised customers, Money Marketing can reveal.

Standard Life head of workplace strategy Jamie Jenkins does not think the industry should be imposing obligatory advice but argues savers entering drawdown without an adviser do need protection.

He says: “We offer non-advised drawdown but, in future, the options available will be restricted to ensure that people don’t stray into more esoteric investment choices without taking advice.

“The new market will be much more about flexible access rather than drawdown, so we need to consider how we make options accessible without introducing additional risk. If there was no non-advised route, then the industry would in essence be mandating advice to access the new freedoms, which doesn’t seem proportionate.”

M Thurlow & Co senior partner Blair Cann says firms’ precaution of restricting savers to less risky investments will still leave customers exposed.

He says: “It doesn’t change my view that to invite people to take drawdown without having taken advice just seems ludicrous. I can’t see how morally it can be justified with providers just shrugging their shoulders. Some of the technicalities of drawdown may not be immediately perceived by the man on the street. Yes, they will have to pay for advice but they will save money in the long run.”

Old Mutual Wealth will accept non-advised drawdown only in “exceptional cases”, for instance if the customer has got financial planning qualifications or works in retail finance, but has no plans for a non-advised drawdown proposition.

A spokesman says: “We believe drawdown is a particularly complex area where individuals should ideally take advice. This is primarily because of the longevity risk associated with drawdown.”

Aegon has combined drawdown and unit-linked guarantees on its platforms but has not yet launched a non-advised product. Aegon chief marketing officer David Macmillan says: “The flexibility we believe has to be there will undoubtedly throw up complex choices that we as providers have to ensure clients can handle, so right across the industry everyone is exploring that challenge”.

MGM Advantage made its first step into the drawdown market in November, launching its advised-only Retirement Account, a platform allowing flexible access as well as guaranteed income.

MGM pensions technical director Andrew Tully says it is “not impossible” the firm would launch a non-advised product in the future but that it’s “not the focus at the moment”.

He says: “The market is complex and from April it’s more complex than ever. Our belief is advice is key to getting good customers outcomes.”

He says the nature of drawdown makes it a particularly complicated area because, unlike when building up pension savings, savers are taking income at the same time as poor investment returns could be rapidly depleting their pots.

Legal & General’s mastertrust has redesigned the scheme’s investment strategy as a result of the Budget. Savers who want to go into drawdown will be moved from the default fund to the new Retirement Income Multi-Asset fund within three years of accessing their pot. A spokesman confirmed this is a non-advised process which is currently only available through the mastertrust.

LV= does not offer non-advised drawdown, although its non-advised fixed-term annuity is technically a drawdown product. But the provider is exploring an “advice light” proposition, with mandatory adviser reviews.

LV= Retirement Solutions head of distribution Steve Lewis says: “We think there’s an opportunity for a new relationship between advisers and product providers, particularly in this arena.

“With the right processes in place we’d be comfortable with a non-advised entry point but married with an advised review process. Where there’s clear investment risk we think it’s very important clients have a trapdoor into advice if they need it.”

Hargreaves Lansdown has offered non-advised drawdown for years.

Head of pensions research Tom McPhail says: “If pension schemes and providers want to offer customers retirement income solutions, they’re going to offer drawdown.”

But he says some may not develop their own drawdown products but rather integrate existing third-party solutions.

McPhail adds providers have been held back while they wait for the FCA to give clarity around how it will regulate the post-Budget market.

He says: “The FCA is very keen to see some kind of development in the middle ground of some kind of simplified advice proposition. There’s certainly regulatory momentum in that direction but the market has been somewhat hesitant to go down that road because of the regulatory risk posed – they want certainty and clarity over the regulatory boundaries.”

In November, the regulator said it would be scrutinising non-advised annuity sales following industry concerns around these products and the new pension withdrawal option, uncrystallised funds pension lump sums.

The Labour party has also expressed an interest in the regulation of the drawdown market. The Labour-commissioned Independent Review of Retirement Income has asked whether a charge cap should be applied to drawdown funds as part of a recent consultation.

Drawdown sales surged 68 per cent in Q3, according to the Association of British Insurers. When the remaining barriers to entry are removed in April, and those deferring making a decision on their pension take action, demand is sure to increase again. Those providers currently resisting non-advised sales may find the pressure of losing business to their more willing rivals quickly leads to a change of heart.

EXPERT VIEW: Alan Higham

Alan Higham Annuit Direct 700

The decision to stay invested while drawing income in retirement rather than purchasing an annuity is one of the most complex financial decisions people have to make.  I was in a public meeting in 2011 when a former FSA pension policy chief was asked whether income drawdown could be sold safely without advice; “No” was his reply.

Consequently, many providers prefer or even require their customers wishing to stay invested to have been advised to do so.

Following the new pension freedoms, going into income drawdown can cover anything from taking a little bit of cash whilst deferring the main retirement decision to wanting to cash in the whole pension over a short period.

Should Mrs Smith have to pay for advice to access £2,000 of her £20,000 pension fund? It may be beneficial to have advice but it is hard to justify forcing her to.

At Fidelity, we believe most people would benefit from taking retirement advice but we do not require them to do so. We do though believe in not standing by and watching our customers make decisions they could suffer from. Yes, we profit short-term if a customer stays invested longer but no-one really benefits in the long run if the customer ends up with insufficient money to live on. We therefore provide proactive guidance to people wishing to go into income drawdown. 

Even experienced, self-directed investors who have built up substantial pension pots benefit from this. Some decide to seek advice as a result, while others are happy to proceed without it, perhaps modifying their approach as a result.

Given the amounts at stake and the irrevocable nature of the decision, transferring a defined benefit pension is one area that we do insist on advice being taken before accepting business. We do not wish to profit at our customers’ expense.

Alan Higham is retirement director at Fidelity Worldwide Investment


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Alan is correct should someone with a £20,000 pot take advice to have £2000 paid out. Not only does it not make sense as the cost of the advice has to added in as well.

  2. Just what, as opposed to full advice, does Alan Higham mean by “proactive guidance” to people wishing to go into income drawdown?

    And what sort of “simplified advice proposition” for such a complex and potentially risky area as Income DrawDown does Tom McPhail anticipate the FCA sanctioning? The two things are fundamentally incompatible. The FCA is still dithering and procrastinating over plans for a simplified advice proposition for ISA’s, for heaven’s sake. What’s it likely to come up with for Income DrawDown or Flexi-Access? If the FCA is genuinely concerned about people making disastrously wrong choices about how to deploy their pension funds, with no comeback if they run out of money, it should simply outlaw non-advised DrawDown. Whilst that might well result in a capacity problem for the advisory sector, it would surely be better than consumers being allowed to make rash and dangerous decisions on their own inadequately informed initiative.

  3. So the FCA should outlaw non advised drawdown I don’t think so as can you imagine all the IFA’s who retire going to an adviser, paying a fee to be told what they already know and probably more than the adviser with less experience. RDR has caused a massive problem with advice being denied to millions as reported recently so individuals should be allowed to make up their own mind

  4. On everyone of our clients that we assess is suitable for drawdown, we undertake a comprehensive cash flow forecasting exercise to show the client if or when they will deplete their fund. It is always interesting to see their reaction.
    So does Mr Higham’s “proactive guidance” or HL’s “middle ground simplified advice proposition” include a cash flow assessment – I won’t hold my breath. But if they did I wonder how many would opt for a non advised drawdown contract or for that matter do the people using the services of companies like HL really understand what non advised really means. Because according to the FCA the general public have great difficulty in understanding percentages never mind phrases such as proactive guidance and simplified advice.

  5. Some things will never change, those that most need the advice can least afford it. The effects of regulation have removed client cross subsidies, and it is no wonder that advisers and providers will be forced to take commercial decisions to exclude a large part of the population.

  6. I have been wrestling with the whole post-April pensions advice thing!

    Picture the scenario if you will.. A customer with a pension pot of £40,000, which could pay a guaranteed annuity of say, £2,000 per year. The customer wants and needs more, so leaves the fund invested and takes £3,000 drawings per year. The fund gradually dwindles away and in 6 years time a complaint is brought forward.

    You have all of the caveats you thought you needed, having advised across the spectrum of products available and having outlined the fact that the fund would most likely reduce in value if they continually took more than a certain figure per year (let’s say £2,000 or less) and still it would be subject to the vagaries of investment markets; but ‘maybe’ the FOS rules that the customer’s capacity for loss was such that, at the time, they should have purchased a guaranteed income/annuity regardless of the extent of your advice and what the customer felt they wanted at that time.

    Further, the fund experienced a fall in its value, due to investment conditions, which accelerated the loss of their capital, further adding weight to the fact that their capacity for loss was such that leaving the funds invested in anything other than cash (or an annuity) was not acceptable, even though cash was never to be a proper solution either.

    For all of this, you struggled to justify a fee of maybe £500 for the original advice, as it was a massive 2.5% of the original pension value. At the time you felt that the customer had received the best solution (of a bad set of circumstances) that they wanted.

    Ask yourselves, is it really worth getting involved, or am I being overly negative?

  7. Never been greatly in favour of the nanny state, so I think if folk want to do their own thing, with some clear basic guidelines and warnings, then they should. Personally although not an adviser I have more than enough expertise to do my own thing, and would greatly resent paying for advice that I do not want or need, and may indeed disagree with.

    That said, I do appreciate the concerns about firms feeling there may be potential comeback on non-advised cases. What is needed is a clear unequivacal assurance from the regulator that subject to clearly laid out guidelines being follwed, caveat emptor will apply. Therein I guess thoug, lies the difficulty.

  8. Chipping ~ There could be an Execution Only (or perhaps Best Execution) option for those who can provide a sufficiently robust case for being able to formulate their own strategy. I can’t speak for DA firms but, as a network member, that’s the procedure we have to follow and it seems quite reasonable. Thus, whilst a stockbroker or (recently) retired financial adviser or someone who’s worked for many years in the pensions arena could reasonably be classified as suitable for EO or BE, Joe Soap who has no relevant experience should not be thus classified. That would deal with it, wouldn’t it?

  9. Not sure I really understand what the fuss is about: if I had £50k in ISAs and had stopped working no one would tell me I couldn’t decide what to do with dividends or capital. Why if that same sum is transposed to a pension can’t I decide what to do with it myself? The whole issue seems to revolve around annuities and the old rules about buying one.

    That’s history and in a few years most will realise flexible access is the default answer, annuities will quickly disappear and the debate will change: I have seldom heard someome say cash in your ISAs and buy a PLA or debate whether an investment portfolio will last a lifetime so we’ll eventually stop asking these questions of pension pots.

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