Personal Pension  

Drawdown demand will burgeon in 2015

There will be a capacity crunch after a five-fold increase in drawdown demand for 2015, Alastair Black, Standard Life’s head of income solutions has said.

The Edinburgh-based company estimates the number of people across the UK choosing income drawdown from next April – when new pension freedoms come in – will go up from six per cent to 30 per cent.

This has led Standard Life to believe there will be a capacity problem in the future.

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Mr Black, said: “We expect at least five times more people in the UK opting for income drawdown from April next year.

“But by the following year you not only have those extra people in drawdown – you have another batch of new customers going into drawdown at five times more than current figures, and so on.

Doing the Maths

According to Standard Life, a provider that currently deals with 2,000 drawdown customers today will be dealing with 10,000 next year – an extra 8,000.

“By 2016, this becomes 20,000 instead of 4,000 – 16,000 extra to serve. In 2017 they have 30,000 instead of 6,000.

“The sheer volume of new customers needing service ramps up rapidly.”

Standard Life customers’ average pot size at retirement (including those going into income drawdown) is £63,000.

Its average income drawdown customer has a fund of £246,000 at retirement.

Excluding income drawdown, the average Standard Life customer has a pension pot of £44,000 (all these figures are before the payment of the 25 per cent tax-free lump sum.

From April 2015, people aged 55 and over will have the freedom to spend the entirety of their pension savings.

Putting money into a drawdown scheme means a tax-free lump sum can be taken out while the rest remains invested rather than buying an annuity from an insurance company.

As part of pension changes, the capped drawdown limit has been raised from 120 per cent to 150 per cent of the annual income a pensioner would have got through an annuity.

The rules around flexible drawdown, which allows unlimited withdrawals from a pot, have also changed, meaning someone only needs a guaranteed annual income of £12,000 to do so rather than £20,000 previously.

David Tiller, head of adviser platform propositions for Standard Life, said: “Platforms’ operational capability will be sorely tested by the rapid growth in drawdown business.

“Many platforms have yet to make the transition to fully clean and unbundled share classes, and are having to devote considerable resources to the ongoing conversion in the run-up to the sunset clause in April 2016.

“Having to also build additional scalability to cope with drawdown demand will put even more pressure on their systems.”

Adviser view

Steve Patterson, managing director of Glasgow-based Intelligent Pensions, said: “A five-fold increase is quite a big number, but it is from a relatively low base in proportion to annuities, so I wouldn’t be surprised if that level of rebalancing is about correct.

“I think people will wish to have the opportunity to disconnect the annuity purchase from their retirement and that will enable people to time annuity purchases when the market conditions are more favourable and when rates are better at an older age.”