Investors risk missing out on up to £75,000 of retirement income by staying in drawdown following the Government’s abolition of annuitisation requirements.
Joint research by MGM Advantage and IFA Intelligent Pensions suggests a 70 year-old with a £100,000 pot could lose out on £75,900 if they stay in drawdown for a further 20 years.
The difference relates to the mortality cross-subsidy, where funds of people who have died earlier than expected are pooled and shared among remaining clients. MGM Advantage pays this cross-subsidy through a lifetime bonus.
Sales and marketing director Aston Goodey says: “There is a huge danger that now people are not obliged to purchase an annuity at 75, they will drift along in drawdown without fully understanding the progressive nature of its risk. Drawdown becomes less suitable over time, as, beyond 75, the ability to deliver consistent investment returns that will compensate for the absence of mortality cross-subsidy becomes unrealistic. This, coupled with rising inflation, highlights how unsuitable drawdown is as a long-term solution for some people.”
The research, based on quotes from the MGM Advantage flexible income annuity, shows a 60 year-old with a £100,000 fund could miss out on £27,200 if they stayed in drawdown for 20 years, while a 65-year-old would receive £45,500 less.