OpinionJun 12 2015

LV heralds brave new world with drawdown liberation

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LV heralds brave new world with drawdown liberation
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A short note to journalists yesterday (11 June), comprising of just a couple of lines, stated, almost as if in passing, that one of the larger life insurers has removed the minimum pot size requirement for clients to enter drawdown. And in that moment the brave new world of retirement freedoms became a reality.

The note was from LV, one of a phalanx of traditional providers to have reduced the entry level for drawdown to £30,000 almost immediately following last year’s Budget. This is the level at which trivial commutation stops, so made sense in that old world, linear sort of way.

We’re not in that world any more and retirement income is now infinitely more conceptually complex. Retirement freedoms may have opened access to pension pots, but more significantly it has heralded the end of a transactional decumulation dichotomy between drawdown and annuities.

A few providers had already dared to dip below £30,000, like Prudential which has set £25,000 as the hurdle for new clients in its Flexible Retirement Plan. But this is the first time I’ve seen the restrictions removed altogether - and I doubt it will be the last.

Regulators and others are still recalibrating the suitability parameters they have relied on for 20 years, since drawdown rules were last substantively reviewed. In the fairly recent past it was a widely held view that one needed a six-figure pot to be a suitable candidate for drawdown.

When the first version of ‘flexible’ drawdown was introduced it was restricted to those who could first secure guaranteed minimum income of £20,000 a year. Even with full basic and additional pension from the state, at prevailing annuity rates you’d have needed in excess of £200,000 to buy an annuity making up the difference before you had a penny to put into drawdown.

As recently as last November, Financial Conduct Authority director of policy David Geale told MPs it believed current drawdown products were suitable for those with £50,000, which already felt anachronistic. He recognised, however, that product innovation would push this lower.

He said: “There is no reason why over time flexible access products need to be poor value for money or to represent a high element of risk: it is about people understanding what they are getting into.”

Regulators are still recalibrating suitability parameters they have relied on for 20 years, since drawdown rules were last reviewed

Absolutely. In fact new world thinking has already thrown up a number of individual scenarios where the case for drawdown is no longer about a simple ‘income for life’ equation.

There are those who, for example, are using drawdown within a blended portfolio approach, which also includes an annuity to meet essential expenses. Or those draining a small money purchase pot while they defer state pension, or until they can draw from a final salary fund.

The key point is Mr Geale’s reference to “people understanding what they are getting into”. This means proper guidance and, where appropriate, full advice.

In this context it was perhaps slightly disappointing that earlier this month one of the largest insurers, Scottish Widows, reported within a month of the reforms just a third of people were seeking Pension Wise support before calling to crack open their retirement nest egg.

It offered no figures on how many did so when it was signposted and recommended. I suspect and hope it was higher and remain convinced that savers, especially those who have internalised the concept of freedoms before getting to retirement, will take up the offer of free guidance.

It is the advice piece with which we should concern ourselves. Aside from the issues of cost that may preclude mainstream savers seeing an adviser, the unfolding debate about so-called ‘insistent’ clients is also key.

For all the good, sensible reasons someone with a small pot may seek to access their fund, there are as many and perhaps even more cases where this would be a terrible decision. At least with adviser support they might avoid the worst tax consequences, or make some longer-term provision.

The FCA attempted to reassure advisers again this week when it published a factsheet alongside its policy statement on tougher pension transfer advice rules, but the truth is advisers remain unconvinced, as our follow-up story showed.

That’s probably as much to do with a siege mentality that has set in across the sector as anything. Whatever the reason, it’s important that this too evolves to reflect the mindset of the new world.

ashley.wassall@ft.com