Government drawdown piggy bank would quieten critics

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Government drawdown piggy bank would quieten critics
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In this column, I may suggest something that could prove a little controversial among investment advisers: the government should consider setting up an arm’s-length default pension account with the option of drawdown.

I think it could suit both consumers and, though it may not seem obvious, advisers too.

It should worry advisers that drawdown continues to attract all manner of accusations, with suggestions that ongoing advice, fund management and/or withdrawals are too expensive, or that many people will end up with the wrong strategy.

I would argue strongly that advice costs are at least as much determined by regulation and the shortage of advisers as by advisers themselves. Moreover, it is those without an adviser that are most likely to come to grief in terms of running out of money.

To date, most of the consumer lobbies’ ire has been concentrated on charges for withdrawals, prompting the Treasury to announce a consultation on charges. This discussion is also looking indirectly at access, although in the area of how easy it is to transfer to another plan.

We might do a better version of Nest for drawdown, which Nest could provide

Given that these pension reforms require minimal rather than maximal compliance from providers and pension schemes, this shouldn’t be a surprise. Yet many headline writers and indeed headline makers, including the pension minister herself Ros Altmann, have gone to town on the issue.

That does not impact advisers much. Indeed, many investment advisers may welcome the move – for example, where a client’s old plans are less likely to face big charges to obtain their money – but the furore and subsequent consultation does suggest that scrutiny will continue to be intense. I suspect the pressure will move towards advisers’ core activities quite quickly.

The critics are a remarkably diverse bunch too and include national newspapers and websites, often big fans of the free market in most areas of life, yet they do not seem so enamoured of the approach when it comes to financial services.

Those of a more paternalistic bent, some of whom would rather the reforms had not happened this way at all, may also seek more controls.

Hence the suggestion that we might do better with a version of Nest for drawdown, a service Nest could even provide. It could create a home for the sort of people who might have ended up with an annuity due to inertia and now could wind up with mid-sized pots in drawdown or uncrystallised pension fund lump sums. It would also provide a default for transfers from schemes and providers that do not want to offer full freedom and choice but who don’t, foolishly to my mind, seek regulated advice.

It could take the heat out of the argument, much as Nest has in the workplace pension space.

There would, of course, be some competition concerns. Some execution-only players and online advisers might not like it. However, it would give a home to lots of those retirees with mid- or smaller-sized pots, about which so many politicians and consumer advocates are so concerned.

And it might then help advisers who provide gold-standard income drawdown to simply get on with the job.

John Lappin writes on industry issues at www.themoneydebate.co.uk