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Withdrawal symptoms

It was only four years ago that newspaper headlines were screaming that drawdown had been a disaster for thousands as falling annuity rates and stockmarkets had decimated their pension pots.

This time around, advisers will doubtless have protected their clients from the worst of what can go wrong with drawdown. But while publicly IFAs say all is in order in the world of unsecured pensions, privately, several have expressed concern at the unsustainable levels of income that clients have been taking.

In 2005, on the tenth anniversary of income drawdown, a report from Annuity Direct concluded that those reaching 75 will be in for annuity rates of half the levels they could have got 10 years earlier. Four years ago, the main reason why drawdown investors had lost out was collapsing annuity rates, which have picked up a little since then.

But taking into account the effect of the financial Armageddon of the last 18 months on fund values, I would not be surprised if similar reductions in annuity income at 75 would be expected today. One adviser I spoke to recently pointed out that many USP cases were reviewed around A-Day in 2006 and will be looking at seeing their income halve in 2011 when their five-yearly review comes around.

This time around, most advisers will have learnt the lessons of the market collapse at the start of the decade and will have been smarter with the way they run income drawdown for their clients. Advisers who have banked gains into cash in the good times should have some cushion to continue income payments with and have educated clients about the need for restrain in withdrawal levels.

Many people are, of course, using income drawdown, or unsecured pension to give it its correct title, for different reasons these days. Clients with assets elsewhere are happy to erode their pots as quickly as possible to get as much cash out as they can before either buying an annuity or going into ASP. For these people, empty pots will be no surprise.

This flexibility, which allows investors to effectively drain most of the money they have put into their pension, has proved a key attraction for drawdown. Despite the bad news surrounding the sector in the middle of the decade, £5bn of new money has gone into income drawdown over the last two years, a figure equal to the sum paid into plans between 1995 and 2000, according to the latest ABI figures. And with over 55,000 new plans being set up since 2007, the appetite for unsecured pension is far from dwindling. It is clear that many clients know what they are doing when they run down their pots.

But for a substantial rump of clients for whom their income drawdown pot is their principal source of income, the last two years have, of course, been disastrous.

I have spoken to several IFAs who are concerned at their clients’ decisions to ignore their advice to rein in their withdrawals. Standard advice may have been to tailor withdrawals to half or 60 per cent of the GAD limits but there are also many people taking more than that. And even those sticking within these guidelines are facing a very steep climb to get their pots anywhere near where they were a few years ago.

IFAs operating in the drawdown space will no doubt have been making sure their income drawdown clients have been clearly warned about the risks of eroding their funds.

But clients who ignore this advice will be looking for someone to blame when they realise their income is to be slashed at their next review. If ever there was a case for laying on warnings with a trowel, unsecured pension is surely it.

John Greenwood is editor of Corporate Adviser


Mitigating circumstances

In the last tax year, alongside income tax bills, £5.3bn was paid in capital gains tax and £3.8bn in inheritance tax.


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