Pension Freedoms Are A Double-Edged Sword

Cash is king, but income drawdown is a pretty close second. That is the message from the figures from the Association of British Insurers that show £1.8bn has been withdrawn from pensions in the first two months following the introduction of the new flexible regime.

Pension investors took out more than £1 billion in 65,000 withdrawals from pension pots, with sums withdrawn averaging £15,500. A further 170,000 income drawdown investors withdrew £800m over the period. At the same time, other investors paid £720m into income drawdown.

Just £630m was spent on annuities, however, barely a quarter of the £2.4 billion that would go into these products over a two-month period in 2012. Back then, before Chancellor George Osborne blew the lid off the retirement savings market, just £100m a month was going into income drawdown products.

It is still early days and it is not yet clear the extent to which withdrawals would have been even higher if some providers weren’t making it difficult for customers to get their hands on their cash. But what these early figures show us is that, not surprisingly, the public have bought into the concept of drawdown in a big way, and that annuities have been the fall guy.

Advisers and providers should make sure they too don’t become the fall guy. The average new drawdown pot was just a shade under £70,000, which as any adviser knows, is a lot to be taking a risk with if that is all you have. The Financial Conduct Authority is doubtless watching with interest as it struggles to make sense of everything the government has thrown at the retirement system.

It will only be a small percentage of those retiring today that will have a substantial defined benefit provision to cushion them and those numbers are declining. The current average money purchase pension fund value stands at circa £30,000 PA.

As advisers we will of course need to ensure that our pensions freedom advice is watertight as we can be in no doubt that the regulator will be ready and waiting to dish out hefty fines. If those exercising these new freedoms are not made fully aware of the risk that they could deplete their pots very quickly if markets turn against them and withdrawal rates are too high.

The pension freedoms are a double-edged sword for the advisory community. On the one hand they have at a stroke reignited interest in pensions, opening doors for advisers and energising the public into saving for their retirement. But on the other the reforms create significant risks that individuals, who think their portfolio will carry on forever, will run out of money. Time for the belt and braces.

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