Clients that are best suited to drawdown

“The general objective of drawdown is to achieve investment growth that will enable the drawdown income to keep pace and hopefully outperform the income that would have been available from an annuity.”

He believes more retirees in the UK could be suitable for drawdown than are currently taking the option. “This is probably due to a lack of education and general awareness of the alternatives to an annuity.”

As regards who is suitable, Billy Mackay, marketing director of AJ Bell, stresses that there is no one-size-fits-all solution as suitability will differ from client to client.

He says any investor considering drawdown must fully appreciate that the remaining fund will remain subject to market conditions and that should a client decide to purchase an annuity, the level of annuity purchase may be less than was originally possible.

Also, depending on the levels of drawdown income and charges, the investment strategy may have to be structured to ensure that the required levels of income are sustained.

Rather than looking at who drawdown is suitable for, it is probably easier to look at scenarios where drawdown probably is not suitable.

Alan Mellor, managing director at Phillip Bates & Co, says this includes small pension funds unlikely to achieve sufficient returns from investments to make the costs worthwhile, risk-averse clients, and clients looking for a guaranteed pension income.

For full income drawdown, he adds, an ideal client would be someone looking to take either their maximum tax free cash and/or maximum income, with a fair sized fund of £100,000-plus, an appetite for some risk, and that is possibly looking to utilise the death benefits from income drawdown that would not normally come with an annuity.

Mr Pennie argues that smaller pension funds are not necessarily unsuitable for drawdown.

“Segmentation by value can be dangerous,” he warns. “Take a doctor with a £50,000 per annum NHS pension and a £75,000 additional voluntary contributions fund.

“The last thing they probably need is more taxable income from an annuity and drawdown may offer more attractive benefits.”

In addition to the attractive death benefits, he adds that flexibility of income can be a key driver for drawdown suitability.

“Examples might include an identified need for reduced income in later years of retirement, or a need to provide bridging income before receipt of state pension, or perhaps, or a need for lower initial income during a period of semi-retirement.”