Retirement outcomes

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One of the key findings of the FCA’s recent ‘Retirement Outcomes Review: interim report’ was the increased take-up of income drawdown. When considering the history of drawdown it’s significant to remember it was initially also described as ‘annuity deferral’. At the very beginning drawdown was available until age 75 and then an annuity had to be purchased.

One of the key findings of the FCA’s recent ‘Retirement Outcomes Review: interim report’ was the increased take-up of income drawdown. When considering the history of drawdown it’s significant to remember it was initially also described as ‘annuity deferral’. At the very beginning drawdown was available until age 75 and then an annuity had to be purchased.

Annuity deferral / income drawdown was a means to an end and not an end in itself. In the interim, the role of income drawdown changed and gradually the need to buy an annuity at all disappeared. Indeed, this was before the pension freedoms regime commenced but the introduction of the pension freedom rules was the time when most people really noticed!

Over time a number of perceptions developed in the drawdown market, which now largely feel outdated:

  • Drawdown was not suitable for funds of less than say, £100,000
  • Drawdown needs more equity exposure than pre drawdown to make it work from an investment point of view
  • Drawdown needs advice for most people

Annuities have not been the flavour of the month for a while now and even since before the introduction of the pension freedoms they have been deemed by many as poor value.

For a moment let’s lose the word ‘annuity’ and change it to ‘guaranteed income’. I would suggest that as part of the retirement plan of most a guaranteed income could still be an important part of an overall retirement income strategy, perhaps alongside income drawdown.

The problem is, annuities look inflexible and people do not like losing control of their pension money. The pension freedoms suddenly made the world look more attractive and people have felt like they owned their pension fund more than they might have in the past, hence income drawdown becoming the norm. It will be interesting to see whether the provision of a guaranteed income (annuity purchase) becomes more popular again in the future as longevity risk becomes more critical.

One of the other conclusions from the FCA report was the need to develop default investment pathways that could take some of the risk out of the equation now that greater freedom is available. The idea being, I presume, that this could enable people to utilise drawdown for the reasons of flexibility and control, yet moves them to a guaranteed income for the right reason at the right time.  Whether this would work in practice remains to be seen.

Some sort of collective vehicle might well create extra efficiencies and could find a natural home in NEST or other master trust arrangements. Finding workable solutions that enable people who might not have traditionally used income drawdown to take advantage of the pension freedoms could be an effective way of preserving full flexibility for those people where income drawdown really is the best way of managing their retirement savings.

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