Opinion  

Advisers are prone to trip up over cap drawdown policy

John Lappin

How likely is it that Labour or a Labour-led government gets elected and then caps income drawdown?

That is almost impossible to say, partly because the UK’s political world is in ferment. Labour holds a very narrow lead in most polls, having seen a substantial lead ebb away month by month. The party has had to come to terms with the Ukip surge clearly presenting a danger to its vote share, and a substantial risk to its target seats and maybe some core ones. Meanwhile, the Scottish National Party on current polls will capture tens of seats in Scotland, too.

But no matter what else happens, it’s important to note that Labour has yet to lose any seats to Ukip. A left-leaning government is a feasible outcome, as the Scottish nationalists and Greens have indicated they would support a Labour government, though perhaps not in a formal coalition.

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This means one must take shadow pension minister Gregg McClymont’s threat to cap income drawdown very seriously.

And that represents a profound risk to IFA businesses. IFAs could have expected a rise in incomes through an increase in income drawdowns, but this is now under threat.

One can imagine how Labour arrived at this conclusion. It may not like the retirement reforms but probably doesn’t dare reverse such a popular proposal or at least not substantially.

True or not, ‘Labour is going to force you to buy an annuity again’ is a very easy attack to make.

Therefore, confronted with the likelihood that drawdown of some description would become a default preference, Labour was always likely to try and assert some control in a different way.

The party will know that income drawdown, depending on the investment strategy and the impact of various fees, means people are more likely to run out of money before they die.

So Labour has sought a political solution to minimise the impact of such charges.

This makes a degree of sense in that some more forward-thinking drawdown providers and advisers have been trying to work out how mini drawdown could be made more cost-effective. Among other things being debated were pricing, passive strategies, online advice, and even IFAs constructing an initial portfolio and then handing the subsequent relationship over to the provider.

Not one of these options was uncontroversial and no one suggested a cap.

Anyway, if this policy gains political traction, here are a few things for the industry to consider. Exactly what part of drawdown might be capped. Fund charges? Admin fees? IFA fees? Or all of them?

Does it suggest that the only really safe IFA business is one based on an hourly fee or will it prove impossible to cap adviser charging and percentage fees.