DrawdownSep 28 2016

Freedom to take too much?

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Freedom to take too much?

In 2015, it seemed as if there was something new in pensions every day. So far this year it seems have calmed down – for the time being – with the focus being more on the EU referendum and market turbulence. The quieter year for pensions legislation will be welcomed by many, as last year’s overhaul of the industry means many more people want access to their pension pots and to find a way to provide an income throughout their retirement

In 2015, it seemed as if there was something new in pensions every day. So far this year it seems have calmed down – for the time being – with the focus being more on the EU referendum and market turbulence. The quieter year for pensions legislation will be welcomed by many, as last year’s overhaul of the industry means many more people want access to their pension pots and to find a way to provide an income throughout their retirement.

Last year’s survey was unfortunately too soon to see the initial impact the retirement freedoms had on drawdown, but this year – now more than a year after the freedoms came into force – things are different and trends are beginning to show.

This year’s survey covers 39 drawdown providers (including some different plans from the same provider) so it gives a broad idea of what the whole industry looks like.

Table 1 looks into the basic elements of each of the respondents within the survey. It includes details such as whether they offer a personal pension or a self-invested personal pension (Sipp) as well as the different drawdown options available, including a new addition to this year’s survey, uncrystallised funds pension lump sum (UFPLS).

Importantly, the Table also looks into the number of drawdown customers and assets under management. Last year’s survey showed that 222,915 clients were in drawdown as at 1 July 2015 and, as predicted, the figure has increased further to 307,492 this year. As with any survey, the number differs from provider to provider, but topping the Table this year is Standard Life, with 72,457 clients in drawdown. This is closely followed by Royal London with 54,170. 

The pension freedoms now mean access to assets has grown, so in line with this, there has been an increase in assets under management. Over all providers, it now sits at £49bn – although larger respondents such as Aegon and AJ Bell did not disclose their assets – a 19 per cent jump on last year’s figure and 157 per cent from the survey in 2014.

Elsewhere in the survey, Table 2 shows the charges for income drawdown, which varies across the board, but does not change drastically from year to year.

Charges for starting drawdown through flexi-access remain relatively low. Some are offering it with no charge (many costs are covered within annual charges) and others around the £150 mark. 

One-off payments are where it can catch clients out – for example, a one-off payment for flexi-access drawdown with Killik & Co could set you back £300, Aegon charges £75 while DP Pensions charges £120. 

As with any product, fees should be looked at in depth because there will always be hidden charges, so while it may look cheaper from the headline fees, there are many other costs to consider. 

Post-freedoms

When assessing last year’s drawdown survey results, it was clear that there had been no major impact during the first few months of the pension freedoms. Now, more than one year on, it tells a slightly different story.

Table 3 looks into the percentage of income drawn by clients. This year, the Table shows figures for both advised and non-advised clients to see if there has been any difference between the two. 

In the past, clients tend to take the most or the least available. Similarly to last year, there is a higher percentage drawing nil income. The difference between advised and non-advised is surprisingly minimal. In fact, the average drawing nil income for both is 52 per cent. The biggest difference only lies with clients taking between 0 and 2.5 per cent income – 10 per cent for non-advised and 19 per cent for advised. 

This year, we also asked providers for the percentage of clients who fully deplete funds. For advised clients, this sits at just 2 per cent, whereas non-advised is 8 per cent. This figure should be taken with a pinch of salt as it could be the pots that are fully depleted are those with very small amounts of money.

Chris Smeaton, director of commercial and strategy at James Hay, says he has seen an increase in investors entering drawdown and an increase in withdrawals due to flexi-access. “Although we have seen some large individual withdrawals under the pension freedoms, the vast majority of those in drawdown are taking a cautious approach and happy to preserve their pension fund.” 

Mr Smeaton adds that nominating individuals to benefit from the pension fund on the member’s death, as it is conventional thinking to see pensions only as providing a retirement income, has generated a lot of income.

However, Elaine Turtle, director at DP Pensions, says she has not seen a significant increase in new business, but did not expect to. “What we have seen is clients who are prepared to pay more contributions into schemes, as there is more flexibility on how they can now take their funds out and the fact that they can pass funds down to other family members,” she adds. 

Risks attached

“There is no doubt that the pension freedoms have had a significant impact on the drawdown market,” Ray Chinn, head of pensions and investments at LV, says. “In many cases, customers will benefit from the greater flexibility that is now available, but the overall risks associated with drawdown have not diminished.

“The importance of not drawing too much income too quickly, the need for an investment strategy that meets long-term needs, and the dangers of sequence of returns risk are all key areas, which, in our view, make advice a pre-requisite for customers who are looking at this type of solution,” Mr Chinn adds.

Whether or not drawdown should only be available to advised clients is subject too debate, with many providers believing clients should be able to do what they want – regardless of whether or not they are advised. 

Ms Turtle says she does not think it should only be advised clients who have the ability to take benefits, but it does make a difference on the type of client. 

“A lot of our clients are very savvy and know what they want to do. However, we do think that the second line of defence procedure clients are made to go through is good. It makes clients think twice and clearly makes them realise the consequences of what they are doing, particularly clients that want – or wanted – to take their whole fund.”

Andy Leggett, head of Sipp business development at Barnett Waddingham, says he believes in treating people like responsible adults. “Providers are quick to point out the benefits of taking advice. The second line of defence is also designed to give people very specific warnings and test whether they know what they are going. In a world where we enjoy many freedoms generally, the right approach is to set up responsible checks and balances and monitor how they are working.”

For Rupert Curtis, chief executive officer of Curtis Banks, there is no reason why non-advised clients should not be able to access drawdown, but he emphasises that advice is incredibly important – especially at the point of retirement. “If clients accumulated their pension funds with the benefit of advice they would experience the same benefits when drawing income.” 

Table 4 looks further into the make up of providers and the percentage of customers that are advised and non-advised. Overall, it is very mixed, but as to be expected, the majority of customers (79 per cent on average) are advised. 

Referendum and pensions

Still the talk of the town, not even the pensions industry can escape Brexit. Robert Graves, head of pensions technical services at Rowanmoor, says if retiring clients want to avoid market fluctuations then the certainty of an annuity may be attractive, but it will not benefit from exposure when markets are on the up. 

“Drawdown, if managed sensibly, can help ride a degree of fluctuation in the markets, but clients will be vulnerable to a sustained downturn if they have no other sources of income. It depends on appetite for risk, so a combination of products may be a solution for some.

“The stating point for draw-down should be to determine a reasonable amount of income that can be withdrawn and maintained over a certain time horizon, while accepting that drawing a higher amount and a concurrent downturn in the market will deplete the fund too quickly – resulting in a lower income in future years, or running out of funds,” he adds.

Alastair Black, head of financial planning propositions at Standard Life, says that what is important – both before the referendum and now – is that customers understand the services and support they will need to retire with a good outcome. 

“The prospect of Britain’s departure from the EU has simply added some new variables to consider. We believe we will continue to see a number of small pots being taken as cash with many people only having saved a short time as a result of recently being auto-enrolled.”

Elsewhere, Greg Kingston, head of communications and insight at Suffolk Life, believes that while there will be no direct impact from the referendum, there may be an associated risk with state pensions running alongside drawdown. 

State benefits

“At present, the UK state pension only increases each year if the recipient is in the EEA [European Economic Area] or in a country that has a social security agreement with the UK. If this was to be reviewed then some overseas pensioners may see their state pension effectively frozen, as is the case with residents of Canada and New Zealand today,” Mr Kingdom adds.

While it is still unclear what impact – if any – the referendum will have on drawdown and the pensions industry, it is clear from this survey that the pension freedoms have led to more clients entering drawdown. The sharp uptick in clients over the past few surveys shows the appetite is there – the industry just needs to keep up. 

Technology is evolving quickly and it is becoming ever more important for providers to continue to adapt to the changing environment. With more clients entering drawdown, it needs to be easy for them to get access to the money they want. 

Whether or not providers agree, advice is key in this industry at the moment.































Vague guidance alone should never be enough for emptying a pension pot, so it is important for advisers to stand up and understand what their clients want.