Who should go into drawdown - and who should not?

This article is part of
Income Drawdown - March 2015

Most over-55s are likely to be in bed or getting rained on with their grandchildren on a beach somewhere when the pension freedoms come into effect on Easter Monday , if they heed the advice of pensions minister Steve Webb.

He makes a fair point: there is no deadline, expiry date or obligation to withdraw from pension pots when the clock strikes midnight on that spring morning.

“People should take their time, seek advice and make informed decisions,” he says. The mantra is that we are living longer and much forethought must go into retirement planning to ensure a sustainable income source throughout.

Considering the likely shift of default option from annuity to unfettered drawdown, the risks of that planning not working out and the pot running dry (or at least such that whatever the objectives they may not be met) will shift to individuals and their advisers.

Who will go for drawdown?

Flexible access drawdown, the new basic income option that replaces flexible drawdown and removes its minimum income threshold, allows you to take as much income from your plan as you like and to vary it as you see fit.

The afforded flexibility, continuing low interest rates and lack of confidence in traditional income sources means it will be the popular choice. So how will it pan out post-April 6: who is FAD suitable for, at what income level, and who not?

Since the pension changes, a number of firms have lowered their minimum pot size to £30,000 - picking up where the trivial commutation limit leaves off.

The Association of British Insurers recently revealed that in Q4 2014, the number of drawdown contracts sold by its members more than doubled compared to the same period in the previous year to 11,454, while average pot size fell more than 30 per cent from £83,400 to £57,600.

Adrian Boulding, Legal & General’s outgoing pension strategy director, says FAD will be very popular. “It will appeal to anyone not yet ready to say their needs are now fixed for the rest of their life. That’s probably most at the point of retirement nowadays, so perhaps up to 400,000 people a year retiring off DC pension plans.”

Rod McKie, retirement propositions head at Zurich Life, says their research suggests that nearly one in three are intending to drawdown after 6 April. He believes with the small pot limit at £30,000, most at and below this will likely be taken as cash, making an effective FAD minimum of “around £50,000.”

Balancing act

Those who go into drawdown must be comfortable remaining invested and have the requisite tolerance for risk. Advice is strongly recommended by most - though there are more non-advised options coming to market - as is monitoring fund performance.

Mr Boulding says the danger is some may draw-down too quickly and run out of money. “My advice to people choosing this route is to use common sense and remember you can only spend your pension pot once.”

Claire Trott, head of technical support at Talbot and Muir, said people need to be willing to be involved in the process, FAD is not suitable for those who want to arrange their income ahead and not have to think about it going forward.