A Cautious Happy 20th Birthday to Drawdown
It's been 20 years since the Inland Revenue issued its income drawdown rules for pensions.
The change in 1995 brought into consideration the first real alternative to annuities for retirement income. Drawdown has always been viewed as the riskier pension provision route, and rightly so, due to the income available being linked to investment returns and you potentially running the risk of outliving your pension, as opposed to the guaranteed income for life provided by annuities.
Drawdown has always had its attraction as well, in the flexibility it provides. Now, the rules have been further improved and thrust onto the masses, with the recent pension reforms ushered in by the Chancellor making it the norm. However, it is a strategy with hidden pitfalls and should still be seen as a means to a particular client goal and not an end in itself.
In the beginning, income drawdown was often known as ‘annuity deferral’, a clue as to how it was meant to be used. An income could be drawn from a pension fund, perhaps to fit in with a phased retirement or to prevent locking into a low annuity rate. At an older age, when certainty and a risk-free income were preferred, an annuity could be purchased.
Today we have moved from drawdown being a means-to-an-end product to it being an end in itself or even the default option. However, there is a danger of putting the product before the need - particularly when the Government has promised all retirees free ‘guidance’ and not ‘advice’ with regards to their options. This has the financial services industry worried that people ‘blinded’ by the press headlines will use their new pension freedoms and access their whole pension fund with little thought for their long term income needs.
Drawdown is a solution to a problem; it is not a product. What is still required is investing in the right funds and having good access to the annuity market. Annuities bring stability while markets can go up and down – recent drops in stock markets prompted by problems in China are a good illustration.
A large proportion of retirees will say they do not want an annuity but many of them still want a guaranteed income in retirement. Independent financial advice is therefore critical to prevent them from being led down the garden path by the drawdown mania.
Don’t let the complexities of retirement planning get you down – contact our Wealth Planning team to find out how we can help you.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at November 2015. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 319 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.
