Pension freedoms impact on flexi-access drawdown

That sea-change did not come, although many advisers and providers revealed their phones had been busy for days afterwards as consumers sought answers to all their pension income questions.

For flexi-access drawdown, the pensions freedom regime brought in by former chancellor George Osborne, made the product widely accessible, both as an option for advisers and for do-it-yourself investors.

According to full-year data from the Association of British Insurers (ABI), drawdown sales has been boosted by the pensions freedoms and choice regime.

As the rules have changed, it is entirely right the FCA is looking at how customers come to their decidion to take their retirement income in this Jon Greer

The data showed:

■ £6.1bn has been invested in income drawdown products since the freedoms

■ There were a total of 90,700 income drawdown products created over that time frame

■ The average drawdown fund had £67,500 invested

■ This compared with £4.2bn going into 80,000 annuities over the same timeframe.

■ For drawdown, 53 per cent chose to go with a different provider at the time they took money from their pension.

Colin Simmons, retirement expert at Prudential, says: “The numbers show pension freedoms was a huge catalyst.

“Before the freedoms, many more people purchased an annuity.”

Intelligent Pensions’ technical director David Trenner believes life offices did not do much to help people post-freedoms.

He says: “All the closed-book companies treated pension freedoms the same way they treated other legislative changes: they did nothing to help the customer they had acquired when buying the business from insurers.

“Their policyholders will still have to transfer to take advantage of the new rules.”

Responsibility

But going it alone in a product that allows a non-advised individual to have no limits on how much they can draw down is not always a sensible move.

Mr Trenner says: “For the majority of of people taking withdrawals, the issue is about sustainability, and not taking the maximum. Taking unlimited withdrawals is not sustainable.”

Jon Greer, pensions technical expert at Old Mutual Wealth, comments: “Before the pension freedoms were introduced there was effectively no such thing as non-advised drawdown.

“A customer previously needed to have £30,000 a year in secure retirement income from other sources before they could even consider the type of drawdown flexibility on offer today.”

A year ago, the former chief executive of the Financial Conduct Authority, Martin Wheatley, told a pensions conference at the time it was up to individuals to take some responsibility for themselves.

He said: “It becomes difficult to sensibly argue that individual consumers should not accept responsibility. Nor, I think, would wider society expect otherwise.”

Mr Wheatley said there would have to be a division of responsibility between consumers, providers and regulators for what happens once the reforms are introduced.

However, less than a year later, the FCA implemented a review into whether pension freedoms could lead to poorer outcomes because of the lack of information, guidance, advice and clarity over what these freedoms could mean.

The FCA’s Retirement Outcomes Review is therefore exploring how to make sure non-advised consumers are not making inappropriate choices.

Mr Greer adds: “As the rules have changed, it is entirely right the FCA is looking at how customers come to their decision to take their retirement income in this way.”

Richard Parkin, head of pensions at Fidelity International, adds: “It’s great to see the FCA is recognising retirement is not a point in time and there is a crossover between the accumulation phase of people saving for retirement, and the decumulation phase when people start accessing their pension.

“But the review does not seem to recognise drawdown is not just a product but a way of accessing pension savings.

“Until people start taking income, the issues around investment strategy and whether their money will run out needs a different approach.

“The focus should be on the impact of taking lump sum withdrawals from savings and less on the way this is done.”

Holding steady post-freedoms

However, as John Lawson, head of financial research at Aviva explains, it has not been the automatic go-to product for advisers or their clients.

Rather, people have been tending to remain in capped drawdown unless they breach any of the withdrawal limits.

He says: “People who had capped drawdown will keep that distinction until they draw more than the permitted maximum allowed.”

The maximum is currently 150 per cent of an equivalent annuity.

Until people start taking income, the issues around investment strategy and whether their money will run out needs a different approach Richard Parkin

Mr Lawson adds: “The big advantage of capped drawdown is savers can continue to pay £40,000 a year into their pension, rather than just £10,000 if they trigger flexi-access rules by drawing more than the capped drawdown maximum.

“It is unlikely savers would voluntarily convert to flexi-access drawdown; rather they would simply keep it until they breach the limits.”

Ray Chinn, head of pensions and investments at LV, agrees there has not been a rush to flexi-access drawdown.

He says: “More people are actually using the flexible retirement income option than before but there are a large number who just want a pension commencement lump sum (PCLS) and nil income.

“That in itself is not unusual - it is just it is more widely available since the changes. Taking the PCLS can make sense in many circumstances, ranging from debt management to simple fears this option might be taken away in future changes to pension policy.

“The fact people are not taking additional, unnecessary income is a positive sign. It is also positive that many people in capped drawdown have not felt the need to break the cap and convert it to flexi-access.”