Retirement Income  

How drawdown developed as a retirement option

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How to help your clients in drawdown

How drawdown developed as a retirement option

Drawdown has come a long way from the days when it was simply an alternative to an annuity.

This is the view of Fiona Tait, technical director for Intelligent Pensions, who believes pension freedoms, along with more modern post-retirement contracts, have helped to make drawdown a more flexible and potentially more appealing option for people.

Ms Tait elaborates: "In 1995, income withdrawals were constrained within certain limits set by the government actuary's department and advice focussed on how the income stream compared with the guaranteed amount available under an annuity.

"This is still a factor but the introduction of pension freedoms means a flexi-access drawdown plan can offer more for clients with different income requirements.

"This means far from having to manage income limits on a yearly or three-year basis, withdrawals from the flexi-access drawdown may range from nothing at all to the full value of the fund, at any time and in any sequence the client requires."

Choices before 2015

Steven Cameron, pensions director for Aegon, has also seen the change in mindset from annuity to invested income product: "Before 2015, most people opted for an annuity to turn their pension pot into a regular income for life."

Before April 2015, people could take capped or flexible drawdown. 

  • Under capped drawdown, the maximum income that could be withdrawn was 150 per cent of single life annuity that a person of the same age could purchase, based on the government actuary's department (GAD) rates. This rate had been increased from 120 per cent on 27 March 2014.
  • Under flexible drawdown, there was no limit on the amount a person could take from the fund as income, but they had to have secured a cross pension income of at least £12,000 a year.

Drawdown, therefore, was seen largely as the demesne of those savers who had accrued large six-figure pension pots. 

After 2015, all new drawdown arrangements were classified as flexi-access and there were two main types of drawdown arrangement available.

These areflexi-access drawdown and the clunkily-named uncrystallised fund pension lump sum (UFPLS).

The Pensions Advisory Service factsheet outlines the new rules applying to new drawdown plans since the pension freedoms came into play - see info box.

Jeff Steedman, head of self-invested personal pension and small, self-administered business development at Xafinity, has welcomed the changes.

"The new flexi-access drawdown offers clients a really excellent opportunity to draw their pension in the most tax-efficient manner," he says. 

"Moreover, the more flexible death benefits that came into force to allow drawdown pots to be passed down the generations more easily, means now adult children can receive these. 

"This means drawdown can provide a better succession planning tool than previously."

Initial concerns

But not everyone was so sanguine at first.

"These changes initially caused the media to speculate as to how these changes would be applied," Rachel Smith, associate consultant for Mattioli Woods, comments.

"Suggestions included individuals accessing their funds from April 2015 to purchase Lamborghinis or other luxury items, rather than withdraw funds in a sustainable way to supplement their income in retirement.

"In our experience, this has proven to be unfounded: most of our clients continue to withdraw funds to preserve their fund throughout their lifetime, taking advantage of the increased flexibility to match their income levels with their needs."