How drawdown developed as a retirement option

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.

The new flexi-access drawdown offers clients a really excellent opportunity to draw their pension in the most tax-efficient manner. Jeff Steedman

"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• Under capped drawdown, the maximum income that could be withdrawn was 150 per cent of single life annuity that a person of the same age could purchase, based on the government actuary's department (GAD) rates.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 are flexi-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."

Shopping around

With the increased flexibility brought in as a result of pension freedoms, the idea was that freedom to take one's pension as one wished should automatically come with more choice, but in reality there seems to be confusion and inertia when it comes to drawdown.

For example, many people still stick with the provider with whom they accumulated the pension, rather than shopping around.

In 2017, it was revealed that some 94 per cent of non-advised drawdown sales post-pension freedoms were made to existing customers, according to figures from the Association of British Insurers (ABI).

Mr Cameron adds: "The Financial Conduct Authority (FCA) is looking at how pension providers might do more to help those approaching retirement to shop around and get the best deal from across all providers, not just whom they have been saving with."

This is why the FCA issued its retirement outcomes review in 2017, in which it analysed the behaviour of people post-pensions freedoms.

Approximately 1m people accessed their pension pots post April 2015, and drawdown has so far proved exceptionally popular, the review highlighted.

The proportion of drawdown bought without advice rose from approximately 5 per cent before the freedoms came into play, to 30 per cent by 2017.

What now?

In the regulator's 2017 Retirement Outcomes document, the FCA said: "This market is still developing and firms and consumers are continuing to adjust to the reforms."

However, it also identified several potential challenges for the industry - regulators, guidance providers, product providers, advisers and policy makers - to attempt to overcome.

The five main areas outlined as concerns by the regulator were:

• Consumers who fully withdrew their pots did so partly because they do not trust pensions.
• Most consumers choose the path of least resistance by accepting the drawdown option offered by their pension provider without shopping around.
• Many consumers have been buying drawdown without advice but may need further protection to manage their drawdown effectively. 
• Annuity providers are leaving the open annuity market, reducing choice for consumers.
• Product innovation has so far been limited.

While the industry works through the various challenges and complexities of the pension freedoms - as Mr Steedman puts it, "deemed a bit of an experiment by some" - the new flexibilities of drawdown have caught the public's attention. 

He adds: "This is a huge achievement, given the pitiful traction of other pension initiatives, and the desperate need for private pension provision for the burgeoning future pension demographic."

For Ms Tait, as a result of the pension freedoms, the very role of drawdown has changed, meaning conversations between advisers and their clients have also changed.

She explains: "Discussions about whether a client should select drawdown or annuity have now evolved into a discussion about how and when clients can use drawdown and annuities as part of their long-term strategy.

"Advice and guidance must still focus on the dangers of running out of money too soon, but the drawdown plan may not itself be required to provide lifetime income, where other solutions are available."

simoney.kyriakou@ft.com