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Variations on a drawdown theme

Proposals for a minimum income requirement raises drawdown concerns

Ray Chinn, Head of pensions and investments LV=
Ray Chinn, Head of pensions and investments LV=

Reading between the lines of the latest HM Treasury consultation on removing the need to annuitise at age 75, one cannot help but sense the concern that people in unsecured pension (drawdown) arrangements might exhaust their pension pots and end up relying on the state in later retirement.

This is demonstrated by proposals for a minimum income requirement which, if a client can secure the MIR, offer a much more flexible approach to taking income and would be per-missible under a new flexible drawdown product.

Although no level has been set for the MIR and no clarity has been provided on what would be deemed accep-table to secure this, the premise is simple – show us you have enough income so that you will never fall back on the state and we will leave you alone.

For clients who cannot do this, capped drawdown is the alternative. This would be similar to the existing drawdown (unsecured pension) arrangement but with suggestions that income limits need to be tightened to avoid clients exhausting their pension pots too early.

This fear has become heightened by the increased prospect of people using a drawdown strategy beyond 75 (few people currently use the alternatively secured pension option due to the inflexibility and draconian tax charges), meaning the possibility of running out of income is greater.

This concern regarding exhausting drawdown funds is not a new theme. For many years now, drawdown has been seen as a risky option.

This concern is not without foundation – and I am not advocating that drawdown income rules should be relaxed or that drawdown is right for everyone but some of the rhetoric which accompanies the concern does need to be looked at in context. My favourite is the debate around the minimum fund size appropriate for drawdown.

Most guidance talks about drawdown being unsuitable for those with small funds and no other assets and income to fall back on. The Pensions Advisory Service website goes further, stating that “it is generally agreed that a fund should be at least £100,000 before income withdrawal is a viable option”.

Unfortunately, it is this warning which seems to have been adopted by many compliance teams up and down the country as the suitability benchmark. Providers (my own company included) often quote this “gen-erally agreed” figure in literature, advisers often find that when their cases are vetted by network comp-liance teams that the £100,000 figure is a significant barrier to writing drawdown business.

My concern is that by applying arbitrary benchmarks, we are in danger of disadvantaging some people who may find that drawdown is perfectly acceptable simply due to the fear that a small fund might be exhausted.

There will be many examples where small drawdowns can work. For example, clients who may be using income drawdown as part of a wider package of retirement planning tools, perhaps using a cocktail of products including annuities or fixed-term annuities to put in place specific income/growth strategies. Or those with other sizeable assets providing income in retirement, meaning that the drawdown is less significant in income terms. Those not requiring an income may also benefit from drawdown – this will provide the opportunity to take tax-free cash but without the need to draw an income.

The selected investment strategy and the costs of running the draw-down plan need to be carefully ana-lysed to ensure that the plan is offer-ing both good value and meeting other client objectives possibly around security of capital – but again one has to question whether an arbitrary limit is the best way to police this type of situation.

Given that the alternative to drawdown, in the form of an annuity, also has risks and provides little or no flexibility through the retirement journey, then the use of arbitrary limits around drawdown can also expose the client to risk simply by removing choice.

The outcomes of the consult-ation will be interesting, in par-ticular, seeing how much the concerns around inappropriate use of drawdown feed through into restrictions around product design.

The danger is that we end up with a regime which dictates that only big is beautiful in this area. This would be a retrograde step and would mean that many advisers and clients would be unable to plan for retirement in a way which best meets individual client needs.

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  1. Good article but who has done the edit-ing??

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