To say 2015 has been a busy year for pensions is an understatement. The complete overhaul of the industry has meant more people will be looking to income drawdown as a way of providing an income throughout retirement.
The new rules mean pensioners can now choose how much of their pensions they move into drawdown (they can still take up to 25 per cent as a tax-free lump sum). An alternative could also be to convert an entire pension pot to drawdown at once or in segments (partial drawdown).
While it is still too soon to determine the impact of the retirement freedoms, this survey may give some insight into potential market trends.
Research from Selectapension shows that the use of drawdown for over-55s has already seen a 174 per cent surge in the three months since the rules came into force in April. Figures show men have been considering drawdown more than women, with take-up increasing 178 per cent year on year for men and 155 per cent for women. The pension and investment software provider’s research also noted that female activity represents just 17 per cent of cases compared with 18 per cent a year ago.
Alastair Conway, chief executive of James Hay Partnership, says the group has seen an increase in investors going into drawdown, with a particular rise in withdrawals due to flexible drawdown. “In May and June we saw 199 accounts closed as the pension flexibilities became available, and in the same period last year only 39 accounts were closed,” he adds. “Although we have seen some large individual withdrawals under the new pension freedoms, the vast majority of those in drawdown are taking a cautious approach and are happy to preserve their pension funds.”
Since 6 April, 77 per cent of Hargreaves Lansdown clients accessing their pensions have done so via drawdown, according to the firm’s head of retirement, Ruth Richards. Rowanmoor has also seen a 32 per cent rise in clients entering drawdown this April (743 clients) compared with April 2014 (561).
A popular choice
It is no surprise drawdown has been a popular choice for many retirees. Ray Chinn, head of pensions and investments at LV=, says the market is up significantly since April 2014, and since this April there have been some new customer segments emerging. “One of the most notable is customers who are just taking tax-free cash – often with no income – in order to pay off debts, for example mortgages and credit cards,” he says.
“We have also seen new propositions coming to market aimed at lower-value drawdown plans where controlling costs is seen as key to making these plans more viable.”
Since April, drawdown has been a more mainstream term, with the government encosuraging its use as an alternative to annuities for the majority, according to Claire Trott, head of pensions technical at Talbot and Muir. But she warns that drawdown should never be used as a default because of the complexities it brings to the planning process. “The client has to decide what the correct level of income to take is and what is sustainable. Drawdown also requires continued investment of funds, which means interacting with pension providers into old age, rather than with an annuity where all the decisions are taken up front when the client is generally younger.”
Table 1 looks at the basic elements of each of the 41 providers that responded to the survey, including details such as whether they offer a personal pension or self-invested personal pension (Sipp), as well as assets under management and different drawdown options.
It also looks at the number of customers in drawdown. The number of customers varies between providers, with Standard Life topping the table with 60,200. However, it should be noted that while all data is as at 1 July 2015, Standard Life’s figure is as at 30 March, suggesting the number of its clients in drawdown would likely have increased further since.
Thanks to the pension freedoms making drawdown more accessible, assets under management have grown in line with the increase in clients in drawdown. From £19bn drawdown assets under management across all providers that returned the survey last year, to £41bn this year, the 112 per cent jump is of no surprise. This figure means there is an average of £185,815 of assets per client, this figure has largely increased from an average £75,695 per client in last year’s survey. But it should be noted that some respondents such as AJ Bell, Fidelity and Sippchoice did not disclose their assets under management.
The Table shows all providers offer flexi-access drawdown, which was introduced in April 2015. Just Aegon and MC Trustees do not offer capped drawdown, while only five providers do not offer phased drawdown – Axa Wealth, Killik & Co, Liberty Sipp, MC Trustees and Royal London.
When in capped drawdown, the highest level of annual income is determined by the value of the member’s fund, their age and the government actuary’s department (Gad) rates. However, Hargreaves Lansdown’s Ms Richards says the Gad rate is “largely irrelevant” for clients wishing to take advantage of new rules. “For those choosing to stay in capped drawdown, a maximum Gad rate of 150 per cent is, in our view, not a sustainable level of income,” she adds. “Investors in both capped and flexible drawdown will need to take care not to erode their capital by taking out large withdrawals, especially in the early years.”
Fiona Tait, business development manager at Royal London, says while the Gad rate now only applies to capped drawdown, she believes the issue of sustainability goes “much wider” than this. “Withdrawals from flexi-access drawdown are only limited by the actual value of the fund and there is nothing that gives the client an indication of how much income it is ‘reasonable’ to take.
“This means that some form of financial advice is essential if large numbers of pensioners are not to run out of money too soon, as has been seen in Australia. Most people underestimate longevity and many do not understand the nature of risk and/or do not invest in funds suitable to provide ongoing income.”
Elsewhere, the survey shows charges for income drawdown, which vary massively across the board. As seen in Table 2, charges for starting drawdown range from nothing, up to £250 with Dentons, Sit Savings and AJ Bell (for clients over 75). There are many providers that do not charge for starting drawdowns, but instead have costs that cover everything in annual fees. And there are some charges that depend on the size of pots. Charges for flexible drawdown have historically been higher than capped, however this year seems to be more even – perhaps a sign of things to come after the introduction of pension freedoms.
All charges vary depending on the type of product – be aware that charges for a full Sipp and a platform Sipp may differ hugely. Ms Trott explains: “This is because of the investments, valuations and disinvestments that are needed in order to comply with the drawdown regulations and requests. In order to provide a benefit crystallisation, where you need to accurately value a large number of different assets, there is likely to be a charge. But if the assets are all mutual funds of funds on your own platform, then there is likely to be little work to do.”
Advised versus non-advised
Table 3 looks into the percentage of income drawn by advised companies. The majority of drawdown clients take either the most or the least available. This year’s survey shows a new trend may be emerging, with a far higher percentage drawing nil income – 74 per cent compared with last year’s 46 per cent. The next 12 months will open up new trends and next year’s survey will be able to look more in depth at the split between different amounts being drawn.
Separate research from Hargreaves Lansdown shows the purchase of an annuity has fallen by more than 50 per cent in just over one year. In Q3 2013, 90,414 annuities were sold with a value of £3.9bn – falling 56 per cent year on year. As at Q3 2014, just 40,085 annuities were sold with a total value of just £1.47bn.
Alongside this, the data shows far more people are now in drawdown. Q3 2013 had 5,480 new contracts, according to the Hargreaves Lansdown data, with Q3 2014 seeing a total 12,212 new contracts – a 123 per cent increase – thus creating smaller pot sizes. The average pot size stood at £63,100 as at Q3 2013, down 24 per cent year on year.
Before the pensions freedoms, the research shows that, of those eligible to take money from their pensions, 34.22 per cent said they planned to take money out, with 11.8 per cent planning to withdraw it all – while 41 per cent said they definitely won’t be taking money out within the next year.
Table 4 shows the breakdown of advised versus non-advised drawdown business. The majority of business for most providers is still advised, but with a slight drop on last year’s survey. This year, the split is 83 per cent advised compared with 17 per cent non-advised – last year showed an 86/14 per cent split.
As expected from a now predominantly direct-to-consumer platform, the highest number for non-advised customers comes from Hargreaves Lansdown – 91 per cent.
It can be worrying that there are many customers still entering into drawdown without advice. However, the government’s scheme – Pension Wise – has been available, offering guidance to pensioners approaching retirement.
“Pension Wise appears to have had less take-up than initially thought, which isn’t actually a surprise,” Talbot and Muir’s Ms Trott says. “Many clients will feel they are capable of making a decision, or if not will seek advice rather than bland guidance. It isn’t possible for Pension Wise to pick up all the intricacies of historical pensions in the timescales allocated to individuals.
“That said, it is a bonus that it will be rolled out to those aged 50 to 55 as well as those 55 and over. It is all a bit too late to consider your options when you want to take benefits, and it means clients will have time to consider their options for longer. And hopefully being more aware of scammers as well, because of the timescales.”
Post-April, people are looking for competitive and flexible ways to provide a lasting income. “Retirement is about doing more of the things you want, when you want, and pensions need to allow people to do this. Income drawdown can work effectively as part of a broader wrapper portfolio to provide tax-efficient income,” says Andy Zanelli, head of retirement planning at Axa Wealth.
With regard to the future of drawdown accessibility, Andy Leggett, head of business development at Barnett Waddingham, says the pension freedoms are arguably the biggest and boldest reforms in a long sequence of changes since ‘simplification’ in 2006. “They were announced with little notice, putting pension providers in an unenviable position. In their respective consultations, I hope the Treasury and the FCA are not overzealous at such an early stage.
“While there may be exceptions, I would be surprised and disappointed if there were widespread provider obstacles or lack of access to the new pension freedoms. Stability in the regulatory environment, a competitive and transparent market, and clear guidance from bodies such as Pension Wise, should be given a chance.”
The next 12 months will be a test to see how trends change within the drawdown market. Then the introduction of the second-hand annuity market will draw nearer, having been delayed from 2016 to 2017 to give policyholders more support in decision-making.
Never has there been a more important time for advice. Guidance alone is not enough for taking out an entire pension pot, so it is vital for advisers to be able to understand all the issues involved in drawdown and what is available for clients in the coming years.
