Pensions  

Drawdown is not the panacea

This article is part of
Guide to retirement income

Drawdown is not the panacea
 Pexels/Karolina Grabowska

Drawdown has proved popular following the introduction of pensions freedoms in 2015, allowing people to keep their pension savings invested, and take a flexible income to suit their needs.

In its January 2021 official statistics update, HMRC reported that the total value of flexible withdrawals from pensions since pension freedoms has exceeded £42bn.

But drawdown also has potential drawbacks. Justin Corliss, senior intermediary development and technical manager at Royal London says: “Pension freedoms gave consumers greater choice over how they use their defined contribution pension benefits, but with choice comes risk.

“Prior to pension freedoms, people still had the option of income drawdown, but they had limits on how much could be withdrawn per annum, and at age 75 they had to buy an annuity.

"This is no longer the case. So, there is a risk that people may run out of money during their retirement. There is also the danger that consumers fear this and as a result are too cautious with their retirement income pot.” 

Drawdown has other potential disadvantage, including exposure to market fluctuations, as Fiona Tait, technical director at Intelligent Pensions points out: “One of the advantages of income drawdown over an annuity is that it is still invested, and the fund will hopefully grow in value. It is also one of the key risks, given that money that is invested in the stock market can go down in value as well as up, and this is certain to happen at some point in the investment cycle.

“Thanks to coronavirus we saw one of the most dramatic examples of this in 2020, and although fortunately markets recovered soon after, most of the investment houses are currently predicting lower returns in 2021”.

Potential solutions

These market fluctuations can be of particular concern to some clients during volatile times – such as living through a pandemic. As Jessica List, pension technical manager at Curtis Banks observes: “While some market fluctuations are expected, drops like last year’s can still be alarming for people.”

So, how should advisers adjust their clients’ pension income, to address this risk?

Firstly, good, clear communication is key, to ensure clients fully understand what to expect, as Keith Churchouse, chartered financial planner and director at Chapters Financial says: “Managing expectations of drawdown plans and how the value of such arrangements may fall and rise has been paramount over the years. It is certainly vital at the outset of the advice and implementation process.

“We have seen market falls, and in part recovery over the last year. However, this experience is nothing new and clients should anticipate this as part of the investment process.”

Advisers can apply their expertise in a number of ways, as Catriona McCarron, wealth manager at Ascot Wealth management explains: “Last year highlighted the reality of sequencing risk – drawing income from your pension via drawdown in a market dip.