What sort of clients will benefit from drawdown?

But just because nobody should be forced to buy an annuity it does not also mean that everybody should be in drawdown - although this seems to be the current modus operandi for a third of retiring Britons.

Earlier this month, FTAdviser reported on data from wealth manager Hargreaves Lansdown which showed the difference in purchasing decisions pre- and post- April 2015 when the pension freedom and choice regime came into force.

According to Hargreaves Lansdown:

• Approximately 90 per cent of people bought an annuity in April 2015; now this is down to 12 per cent.
• Some 34 per cent are remaining invested and drawing from their pension in some form of drawdown arrangement while 54 per cent are cashing it in.

FTAdviser also reported that, before pension freedoms, annuity sales were running at approximately 350,000 a year; the number today is more like 80,000.

Putting this in another context, figures from HM Revenue & Customs, published late last year, revealed 42,700 drawdown plans had been opened by the end of the second half of 2017, compared with just 13,800 annuity sales.

Individual clients may have different priorities in retirement, and should ideally receive individual financial advice. Fiona Tait

HMRC also said the number of people accessing flexible pension payments has increased by 25 per cent in the third quarter of 2017, compared to the same period in the previous year, reaching 198,000 people.

So, who benefits most from drawdown out of those 34 per cent choosing the option at 55? And for whom is it suitable?

People who want flexibility

For Rachel Smith, associate consultant for Mattioli Woods, not all individuals in a drawdown arrangement will need to vary their income levels from time to time, nor will they need to take "unusually large payments", but having the option open to them to do so is important.

She explains: "We find clients tend to be comforted by their ability to access their hard-earned pension savings, even if it is not always needed."

There may be many reasons why people need the flexibility that drawdown can bring, as Fiona Tait, pension technical director for Intelligent Pensions, elucidates: "There are many obvious situations where drawdown might be suitable."

1) Clients who need to be able to manage income withdrawals

• Those who want access to a pension commencement lump sum to meet a one-off expense but do not need ongoing income.
• Those who want to semi-retire and do not need the full amount of income available.
• Those who have other income sources and want to manage their tax liabilities.
• Those who do not want to commit to an annuity until their income needs and/or those of their spouse are more certain.

2) People who like managing their money

Ms Tait also advocates using drawdown when there are clients who "want to continue with active investment management, rather than settle for a predicted level of income".

For example, these could be experienced investors with proven investment expertise, or they are used to working with a qualified financial adviser, who they trust to manage their money for them.

3) Clients who want to pass on benefits tax-efficiently to their chosen beneficiaries

This has become all the more common a reason after the pension freedoms were brought in. Ms Tait highlights situations where inheritance might be a good reason for people to use drawdown: 

• Where the person has non-standard family arrangements, such as more than one marriage, and/or children with different spouses.
• They have no need of income themselves, and would rather their family benefits from the fund instead.
• They have inheritance tax (IHT) issues and want to pass on the maximum amount outside their estate.
• They want to bypass one or more generations and leave assets to younger family members.

Women

Evidently, men and women both have to pay bills, eat food and buy clothes in retirement but recent research from Zurich has found women are far more likely than men are to have a poorer outcome in terms of drawdown.

In its Drawdown: is it working for consumers? report, published earlier this month (April 2018), the life and pensions provider revealed women in drawdown currently face a 37 per cent shortfall in their annual retirement income. 

In real terms, this equates to a £47,000 differential on average.

As a result of this newly emerging 'gender drawdown gap', they need to find riskier investments if they want to keep pace with men. 

According to the report: 

• Men in drawdown have an average pot of £212,000. At a 3 per cent yield, this would secure an annual income of £6,360.
• Women in drawdown have an average pension pot of £132,000, equating with the same yield to an income of £3,990 a year.
• Longer life expectancy for a female means they will have to stretch out their pot for a longer period than a man would.
• A woman retiring at 65 can expect to receive £47,400 less income over a typical 20-year retirement.
• Only 32 per cent of women in drawdown are getting ongoing financial advice.

Commenting on the report, Rose St Louis, spokesperson for Zurich UK, says: "Women already face barriers to securing a comfortable retirement income and it's no longer just down to the pay gap or career breaks."

While pension freedom has given people greater flexibility in terms of how and when they take their pension pot, Ms St Louis adds: "There are clearly unintended consequences emerging".

Anyone - with caveats

According to Jeff Steedman, head of self-invested personal pension and small, self-administered business development at Xafinity, each case should be looked at on its own merit.

This isn't a cop-out: he believes there are certain situations to which Sipp or Ssas drawdown "might be the immediate answer to", such as liquidity issues, "where the majority of funds are invested in commercial property, but the person needs to start receiving pension income."

Yet that need for income must be balanced, he says, against all of the client's circumstances, as there may be more tax-efficient ways to provide the income they are looking for from other investments or savings.

We find clients tend to be comforted by their ability to access their hard-earned pension savings, even if it is not always needed. Rachel Smith

Ms Smith is of a similar opinion to Mr Steedman. She elaborates: "Many clients can benefit from drawdown - unless they have very specific needs for guaranteed income during retirement, with no risk involved."

In such cases it is imperative that individuals seek, as the bare minimum, guidance from services such as The Pensions Advisory Service or Pension Wise. 

As with most things, advice is crucial. Ms Tait states: "Individual clients may have different priorities in retirement, and should ideally receive individual financial advice, based on their own particular circumstances."

Moreover, if clients are simply averse to the current low rates on annuities, or "just doesn't like annuities", perhaps as a result of reading too many headlines, Ms Tait adds, these people should be discouraged from using flexi-access drawdown, unless one or more of the above factors apply. 

simoney.kyriakou@ft.com