Pru warns against tougher rules on drawdown

Pru warns against tougher rules on drawdown

Putting in place barriers for people wishing to enter non-advised drawdown could have adverse consequences, Prudential has warned.

The provider’s head of business development, Vince Smith-Hughes, said more people would be inclined to take their whole pot as a lump sum and pay high tax charges if they were forced to seek mandatory guidance or had other hurdles thrown in their way before they can access their money.

Speaking at a briefing on new research around the pension freedoms, carried out by independent ratings firm AKG, Mr Smith-Hughes said he appreciated the regulator was concerned about non-advised drawdown but cautioned against taking action that was too restrictive.

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He said: “There is a danger, [which] applies to advised and non-advised people, which is that if we make it too difficult for someone to go into drawdown people will [be inclined] to just take their whole pot in one go, which has then got significant tax consequences.”

The Financial Conduct Authority (FCA) is in the process of reviewing non-advised drawdown with a view to making it safer for people to retire outside of the annuities market.

In its interim report of the retirement outcomes review published last July, the FCA noted a significant spike in the use of drawdown products and said it was considering the introduction of "default investment pathways", prices for which would be capped at a certain level.

The work and pensions select committee, meanwhile, has urged the government to force providers to send clients wishing to access their pensions to seek guidance from the government’s free Pension Wise service.

But Mr Smith-Hughes said: “We’ve got to be careful to not make it too difficult for people to go into drawdown otherwise we will end up with people going ‘I only have £70,000, I’ll just just take the whole lot and take the tax hit’ and that’s just a worse outcome for most people than going into drawdown.”

AKG’s research found drawdown was becoming more and more mainstream, with advisers expecting most new income drawdown business in 2018/19 falling in the £100,000 to £250,000 range.

At the same time the firm found the advice gap showed no signs of abating, as demand for advice still outstripped supply.

About 77 per cent of advisers said they are spending more time and resource on the provision of retirement advice since the introduction of pension freedoms.

For most of the about 100 advisers asked, service delivery standards were the top requirement (58 per cent) for pension providers to be considered successful, topping product range (54 per cent), financial strength (48 per cent) and digital capability (45 per cent), which was yet another sign that time was precious, AKG said.

Drawdown products were also identified as the area where advisers would like to see most further development or improvement in the retirement space (47 per cent), alongside guaranteed capital solutions (31 per cent).