Advisers should look to adapt their processes in response to increased demand for drawdown, a report has said.
In its paper 'Retirement income: Are we ready for drawdown as the new normal?', published on 18 September, adviser platform Nucleus Financial warned advisers needed to consider whether they have the capacity to cater for the growing market, as more people opt for drawdown in retirement as opposed to buying an annuity.
Advisers were also urged to engage with their clients earlier in the process in order to better assess whether or not drawdown is suitable for them. The report suggested clients should explore drawdown as an option well before reaching retirement age.
According to latest FCA data twice as many pots are being accessed for drawdown than to buy an annuity with 32 per cent of these accessed without advice, compared with 5 per cent before the freedoms.
Advisers should look to capture more of those customers, Nucleus said.
Rachel Vahey, product technical manager at Nucleus, said: "The pensions industry was turned on its head when the pension freedoms were introduced in 2015. Since then drawdown has become an increasingly popular pathway for people entering retirement and advisers have been helping them to do this safely.
"Advice firms need to ensure they have adapted their processes to meet customers’ needs, and consider whether they have the capacity to carry out the extra review work that will be needed as a result.
"Likewise, customers need to be safeguarded in this new environment, both in terms of avoiding running out of money, but also giving people permission to live the retirement they’ve earned. Both may involve rethinking traditional approaches to retirement planning.
"Speaking to policymakers and experts allows us to assess where the industry is at and what advisers need to be doing to navigate what has become something of a balancing act, ensuring the best possible outcome is achieved for the customer."
Nucleus warned recent changes in the retirement income market could have a detrimental effect on people who don't seek advice and are leaving themselves open to scams.
Michelle Cracknell, chief executive of The Pensions Advisory Service (TPAS), who was quoted in the report, said the problem was people were entering into drawdown without fully understanding the implications.
She said: "With pension freedoms people are looking to access their pot. They don’t want an annuity, for no other reason than they’ve heard it’s bad, so they don’t even consider it, it’s off the table.
"They’re really just using drawdown as a facilitator to access a cash sum, and haven’t really thought about the tax implications between the different types of drawdown.
"They also don’t give thought to the long-term position, around ‘What am I going to do with my fund?’ ‘How am I going to draw it down?’ And most importantly: ‘Where am I going to invest it?'"
In April 2018 the Work and Pensions committee called for a form of default drawdown to be offered to savers to mitigate any detrimental effect from seeking drawdown without advice.
According to this, those who haven’t made an active choice on investing or spending their pension pot would move into a regulated default product.
In the FCA's Retirement Outcomes Review, published in June 2018, the watchdog said it was considering requiring providers to offer ready-made drawdown investment solutions.
But Nucleus said default investment pathways were only part of the solution to achieving better retirement outcomes.
It stated: "Default investment pathways may have a role in guiding people to better retirement outcomes.
"But the ultimate failsafe in getting people to make informed retirement decisions will always be advice – we need to work together to make that a reality for as many retirees as possible."
Claire Trott, head of pensions strategy at Technical Connection, said: "The pension freedoms have made the choices at retirement of many much more difficult.
"This is mainly because the majority of those coming up to retirement used to buy an annuity, either with their existing provider or shopping around. Choice was limited but even if they chose the wrong option they were still going to get an income for life.
"With drawdown becoming more popular making mistakes will have greater consequences, this could take various forms but the outcome is likely to be the same, less money than anticipated in during retirement.
"Those that aren’t advised are at greater risk of scams, poor investment decisions and accessing too much too soon. In most cases advice is key to a good consumer outcomes using drawdown, which is why it historically was mainly only available to those who were advised."
rosie.quigley@ft.com
