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Nic Cicutti: FCA needs to point the way on drawdown


Those of a younger generation might not remember this, but there was a time when for many people the most popular form of long distance travel used to be hitchhiking.

Nowadays many people worry about being picked up by, or giving lifts to strangers. But 30 or 40 years ago, if you were skint, did not own a car or just had time on your hands, hitching a lift was a better option than a bus or a train.

Of course, the trick was to pick the right lift. I still remember being totally lost at a junction miles from anywhere, with barely half a dozen cars passing me over the next hours. What should have been a one day journey, at most, from A to B left me spending the night in a hedge before resuming my trip the next day.

Millions of pension savers must feel a similar sense of being completely adrift when trying to work out the best options for their retirement.

As Money Marketing has repeatedly reported in the past year, one of the side-effects of the Government’s relaxation of the pensions rules has been to create more potential confusion for would-be retirees.

This is particularly evident when it comes to drawdown products. According to the Financial Times last week, drawdown sales have rocketed since the relaxation of the pension regime in April.

The paper reported that, according to data from the Association of British Insurers, almost 19,000 drawdown products were sold in the second quarter of 2015. This is equal to the same number of drawdown products sold in the whole of 2013.

What also appears to be happening is that, whereas once upon a time, drawdown was considered an option primarily for savers with in excess of £100,000 – some used to say £200,000 – in their pension pots, many providers are reducing this requirements to £30,000 or less.

Talking to some advisers last week, what appears to be happening is many savers keen to access some of the tax-free element of their pensions are electing to switch their funds into drawdown products, which make such a withdrawal easier.

They are currently choosing not to take any additional income from their pots and intend to leave the rest of their money fully invested for the next 10 years or more.

Arguably, a key concern about drawdown was over the potential to take too much of an income at the start of a person’s retirement, leaving not enough for later years.

If so, under the scenario described to me by the advisers I spoke to, the risk of making a catastrophically unwise choice – as opposed to just a poor one – is less likely.

But that still leaves open the issue of the opaque charging structure of many drawdown products. The FT’s own investigation found a bewildering array of costs, including set-up charges, annual lump sum admin fees, plus percentage charges on the total lump sum under management. One or two drawdown providers also levy a withdrawal charge when people want to take some or all of their tax-free cash.

Comparing providers’ drawdown products, even ones where the underlying investment is looked after by the same fund managers, is fiendishly complex. Yet the options available to those searching for the best solution to their needs are limited.

At this point, I can already sense one or two advisers sharpening their quills to inform me that, of course, this is a logical consequence of the “advice gap” caused by the RDR. The Government’s new Financial Advice Market Review will, of course, solve this problem.

Except that this is emphatically not a problem the review was set up to solve – and nor will it. In the absence of many providers’ inability to offer simple and easy access to savers’ tax-free cash, many are opting to switch into more complex products that can deliver the same thing – but at a cost that is difficult for them to calculate.

Whereas once upon a time advisers took a leading role in exploring the annuity market on behalf of clients about to retire, drawdown often involves even more complex research. Yet the product itself is being touted to a new market advisers do not want to bother with. Nor will banks or other direct salesforces.

Meanwhile, Pension Wise is slowly turning into a service whose limited number of users are finding difficult to understand in its present form, where one generic – and tightly scripted – session is all you get. How else do we explain the growing call from Citizens Advice, who are managing the face-to-face service, for Pension Wise “customers” to be offered two meetings instead of just the one?

When the pensions system was liberalised last year, many commentators described the reforms as a “revolution”. If so it is an incomplete revolution, where key elements that might allow more sensible decisions to be made by savers are not yet in place.

For example, ways for consumers to make informed decisions on the basis of some form of standard charge illustrations that offer total cost comparisons for pension pots of different sizes.

As I discovered when hitchhiking many years ago, the next best thing to a lift that will get you out of your predicament is a clear map. The FCA needs to step up and provide one for drawdown products.

Nic Cicutti can be contacted a



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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Informed decisions will be based on a lot more than cost. As we know, suitability is complex and getting it wrong can seriously affect people which is why advice is regulated. If you do it yourself you take the risk. If you want regulated advice then you have to pay. The elements you’re looking for are in place Nic, they’re just not free…

  2. @greyarea – spot on. It seems that advisers’ years of knowledge, experience and skill are considered as nothing and are not worthy of payment. And unlike accountants, lawyers, actuaries the cost of our service is regulated and monitored in a way theirs isn’t. If clients are to receive advice at a lower cost then you have to create a playing field where the cost of being on that field is not so prohibitive, and where the rules and regulations are not so prescriptive. Otherwise we get what we have got now. Which is not good.

  3. “The FT’s own investigation found a bewildering array of costs, including set-up charges, annual lump sum admin fees, plus percentage charges on the total lump sum under management. One or two drawdown providers also levy a withdrawal charge when people want to take some or all of their tax-free cash.”

    So an initial charge, plus an annual charge (fixed plus a percentage). And some additional ancillary charges for certain transactions as and when they arise. This is complicated?

    God forbid Nic ever, let’s say, goes on holiday. Charges for the hotel, charges for full or half board, and then there’s a different charge for the airline… and also there’s charges for nights out and souvenirs which are impossible to obtain information on before you fly out. How can anyone be expected to understand this fiendishly complicated and opaque charging structure?

    The Santander 1-2-3 current account is more complicated than many drawdown plans.

    From online forums, my impression is that those who have visited Pension Wise usually emerge frustrated at the lack of actual help – the guidance person stuck rigidly to a script, gave them some basic information they could have found elsewhere, and that was it. Why would they want a second session so they can listen to the Pension Wise person read their script again?

    • “From online forums, my impression is that those who have visited Pension Wise usually emerge frustrated at the lack of actual help – the guidance person stuck rigidly to a script, gave them some basic information they could have found elsewhere, and that was it. Why would they want a second session so they can listen to the Pension Wise person read their script again?”
      Not sure which forums you mean (apart from the predictable bleating from certain sections of the advisory community). No-one having a face to face Pension Wise appointment is read a script and each appointment is tailored to the individual’s circumstances. Interestingly tehe most common wish by those having an appointment is to access TFC and not draw any other funds until a significant number of years ahead. I can state from my experience and those delivering PW appointments in my area that the level of customer satisfaction would make IFAs blush with embarrasment, hardly indicactive of frustration, rather of a much happier outcome.

  4. I heard an amusing anecdote recently. On being told that a minor, but necessary surgical operation would cost £10,000, the patient asked his surgeon how he arrived at that cost. “Well, it’s £1,000 for the procedure………and the rest is for knowing how to do it properly’. Says it all really.

    • I think we’ve all come across people who have tried to complete the op themselves but found that the stitching came undone! Investment is an easy business, in a rising market!

  5. It’s not just the complexity of DrawDown or the cost structures of most such plans or the costs of researching and advising on them but also the risks of withdrawing too much from them and the irrecoverable damage that a fund can suffer if it falls in value but a set level of withdrawals continues unchecked. Of all these issues, most punters haven’t the faintest awareness.

    I would like to see a DrawDown product that works like an ISA, whereby you can specify withdrawals as a percentage of the ongoing value of the fund, variable from month to month. Provided that percentage isn’t set unrealistically high, the only (significant) risk with such a product would be that your income will vary from month to month. That’s vastly less dangerous than the damage that can be inflicted by a fixed level of monthly withdrawals if the value of the fund falls, as it inevitably does from tie to time.

    The other DrawDown product I’d like to see is one designed to utilise (spend) the entire fund over the remaining (underwritten) lifetime of the recipient, with an insurance element against premature fund burn-out. Some people will die early (so no insurance pay out), hopefully the fund will perform better than a hardly challenging long term benchmark of say 5% p.a. (so no insurance pay out) and relatively few will live significantly beyond their underwritten expected lifespan. That insurance pay out wouldn’t fall due for upwards of 15 years hence, so how could it need to cost very much?

    My prediction is that such a product, offering right from day one (as it theoretically could) a significantly higher level of income than just about any annuity but with the same degree of security and/or a higher level of income than would be safe by way of unsecured DrawDown, would leap to the forefront of the market and clean up. It’d be so easy to explain and for clients to understand and as easy to compare competing products as if they were annuities. Who but the most adventurous of pensioners (and how many of those are there?) would choose anything else?

    Death benefits, I suggest, other than for a surviving spouse, would be a very secondary priority ~ it’s my pension fund and I need to get the maximum possible value out of it RIGHT NOW whilst my spouse and I are still alive. This is what I’ve spent the last 20 years saving for. If there’s some of my fund left for the kids after we’ve gone, fine, but that’s not the priority.

    But no provider seems prepared to do it. They (their actuaries) all say that the guarantees would be too expensive. Not even the mighty Prudential seems to think it can do it. Yet we’re seeing a proliferation of DrawDown products with various guarantees, just none like this. Why?

  6. From my perspective the problem with drawdown is one of potential conflict of interest.

    Taking the situation where there is a choice of benefits at vesting how much influence is there when considering that if the client stays in drawdown the funds are still invested and fees are still ongoing? With these ‘terrible’ annuities the fee is a one off – wham bam – thank you ma’am and no further charges to the client.

    What pressure do companies put on advisers? Indeed what pressure do advisers find themselves under when deliberating these choices? Are we to have a review in years to come resulting in the usual fistfuls of compensation?

    • There are no further charges to the client because in all likelihood if you sell them an annuity there is nothing to review, no further ongoing work required.

      Harry, do you honestly think that advisers are selling drawdown to clients who really aren’t prepared to take risks in their retirement – which is a slam-dunk nailed-on FOS case with full compensation and 8% interest waiting to happen – so they can continue to get their 0.5% per annum?

  7. When the pensions system was liberalised last year, many commentators described the reforms as a “revolution”

    I think most people in the industry knew it would be a dogs dinner.

  8. There is no winning is there?

    Transparent and simple menu of charges for completing various tasks turns out to be a bewildering array of hidden charges.

    Jeez, is it to much to ask that clients add up the three or four charges that might apply if they want to do something that requires work?

    Of course we could just adopt a simpler model where providers build in an assumed take-up and charge everyone the same amount leading to cross subsidy by those who are in the straight growth phase of those who want drawdown or cash.

    Question those who just find a reason to whinge need to ask is this

    Do you want straightforward list of clear monetary charges that requires some engagement of brain or do you want simple one charge fits all rip-off cross subsidy – make your flippin’ mind-up.

    Ian Coley

  9. Good point Ian. If there was one flat charge Nic would complain that charges are opaque and how do people know what they are paying for.

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