Is there still a market for ‘limited’ flexible drawdown?

This article is part of
Income Drawdown - March 2014

There has been a lot of focus in recent months on the ‘at retirement’ market, mainly directed at annuities but also indirectly bringing in other income options, such as drawdown.

Given the nature of complaints relating to how much income can be secured through most products due to longevity, low gilt rates and persistently low interest rates, flexible drawdown in particular should be attracting more attention.

The option was first announced by the new coalition government in 2010 as part of a range of changes to do away with secured pensions and the effective compulsion to annuitise.

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As the name suggests, flexible drawdown is free of the tie to annuities and therefore gilts longevity trends. There are, in fact, no income limits at all, meaning retirees can draw as much income as they like and can even draw their whole pot.

The caveat: retirees must be able to prove they have a minimum income of £20,000 a year, which has to be guaranteed and likely places the individual back into what is likely to be an expensive annuity.

The risk: the pension remains invested, meaning where the whole fund is not withdrawn it is subject to market fluctuations and can therefore rise or fall depending on investment performance.

So what’s the appeal?

Carl Lamb, chief executive of IFA Almary Green, says: “The advantage is that if you are fortunate enough to have that guaranteed level of income then the legislation gives you a greater level of freedom and choice of how and when you draw your income from the fund.”

Clare Bruce, a chartered financial planner at Guardian Wealth Management, says it provides a “great advantage” to early retirees who wish to use their pension money to fund a lifestyle “in the early years”, when GAD and annuity rates can be lower than expectations.

She adds it can be used as a form of tax planning by taking the whole pot: putting crystallised pension funds, which would ordinarily be taxed at 55 per cent on death, back into that individual’s estate.

According to Adam Wrench, head of business and product development at London & Colonial, flexible drawdown will only be attractive to wealthy retirees, who have other sources of retirement income available and be in possession of sufficient assets to make inheritance tax liability a “major concern”.

Indeed, data published by the Pensions Policy Institute revealed that in 2010, 200,000 people - or 2 per cent of people aged 55 to 75 - were able to use flexible drawdown. A further 500,000 people may be able to use it when they reach their state pension age.

Why so little uptake?

Flexible drawdown is not offered by all providers, probably due to the limited market because of the minimum income requirement.

Mr Lamb says the MIR is typically formed of a combination of state and occupational pensions - and often lifetime annuities - and excludes all other forms of income such as investment and rental income.