“Decisions will need to be made, sometimes unpleasant ones, if the investment performance is low or income taken too high. They have to be willing to take the risk with future income because there are no guarantees with FAD that it will outlast them.”
Garry Latimer, innovation architect at Aegon, emphasises that the flexibilities inherent in the new income drawdown mean it could be a sensible choice for many. While funds are at the mercy of the markets, they at least stay invested and benefit as markets grow.
“Flexi-access with guarantees provides a balance between security of income, potential to grow, flexibility and access if needed and to respond to change,” he says.
“It won’t be right for everyone, but with the right investment choice and responsible use it’s no worse than taking and spending the whole pot or putting it in a vehicle that makes it easy to spend and with growth that may not keep pace with inflation.”
David Trenner, technical director of Intelligent Pensions, said FAD should only be used to provide sustainable income, although could be useful if a lump sum is needed if getting a loan at reasonable rates is difficult. The tax-free option should only be used to clear borrowings, he added.
“For people who rely heavily on their pension funds to supplement their state pension and provide the basic necessities, FAD is not suitable. These people may believe annuities are not for them, not least because they underestimate their life expectancy,” he says.
Not black and white
A third way is becoming increasingly apparent for those in Mr Trenner’s conundrum. Not ‘either, or’, but ‘and’: the age of the blended solution may be coming.
Fiona Tait, business development manager at Royal London, agrees with those who predict an increase in the use of drawdown plans
“I don’t believe however that this means people will never use annuities,” she says. “I’m sure some will use a combination, either in tandem or one after the other, to meet their ongoing needs throughout retirement.”
Mr Boulding elaborates that he expects the way most will run it by determining the regular monthly amount they want depositing in their bank account that will cover regular outgoings.
“On top of that, they may ask for additional amounts from time to time, a lower amount or to miss a month’s payment if they have unused funds building up in their bank account.” Later in life, they may still buy an annuity, perhaps aged 75 when settling down into a routine pattern of retirement.