Recent research shows consumers are increasingly accessing pension drawdown without taking advice.
The Financial Conduct Authority says that individuals who access their pension pot flexibly may need extra protection to manage withdrawals effectively, after it emerged that the number of people going without financial advice has risen dramatically.
Figures published in the regulator’s July 2017 Retirement Outcomes Review Interim Report reveal that the proportion of individuals who forgo advice and take a ‘DIY’ approach to managing their pension pot in retirement has risen from 5% to 30% following the introduction of pension freedoms legislation in 2015.
Prior to April of that year, savers were faced with restrictions on when and how they could access their pension pot. Consequently, over 90% of pots were used to buy annuities. Today, as a result of the new freedoms, twice as many pots are moving into drawdown than are being used to purchase annuities.1
Yet concerns are growing for those who choose to draw on their pension savings without taking advice. Drawdown demands a different mindset to that needed by those who retire with an annuity, as it requires individuals to plan their own investment strategy and ensure that withdrawals are sustainable. Many individuals, however, are not well placed to make investment decisions at retirement and are often ‘daunted’ by the array of choices on offer.2
The Financial Conduct Authority says it is particularly concerned that savers could end up following an investment strategy that is not suitable, given their risk tolerance and what they intend to do with their pots in the future. As a result, they could take on excessive levels of investment risk or, conversely, miss out on investment growth where they have invested in overly cautious assets.
The same research finds that individuals who access their pots without taking advice typically follow the path of least resistance, and opt for the drawdown plan offered by their current pension provider without shopping around. Furthermore, few consumers understand what happens to unused pots upon death, and why pensions might be more favourable than other savings vehicles for Inheritance Tax planning.
The penny drops
When those who had emptied money out of their pension were presented with some basic information about life expectancy and the amount of money they may need to live off in retirement, many started to question whether they had acted too hastily, without understanding all the facts. Overall, around half said that they might have followed a different path, had they seen the data first.
The research highlights the challenge that lies ahead for thousands of savers who have yet to start taking benefits from their pension. It also emphasises the need for the government to review the guidance and information that is available to individuals in advance of accessing their pension pots – and when they actually dip in.
“People may need a retirement investment strategy that can last for 30 years or more, so it’s vital that they get the right support. In many cases that support should be provided by a financial adviser,” says Ian Price, divisional director at St. James’s Place.
“Individuals opting for drawdown will need to generate an income using assets whose returns can often be unpredictable. What’s more, withdrawals need to be taken at a rate that avoids a shortfall later in retirement. This combination of risks is very difficult to manage on your own,” he says.
“A financial adviser will recommend an investment strategy that is right for you – and can show you when your fund would run out at the level of income being taken.”
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
Income drawdown will reduce the size of your pension fund and the investment growth may not be sufficient to maintain the level of income you wish to draw. If you withdraw money at a rate greater than the growth achieved by your investments, your remaining fund will reduce in value. The level of income you take will need to be reviewed if the fund becomes too small - this is more likely the higher the level of income you take.
The income you receive many be lower than the amount you could receive from an annuity, depending on the performance of your investments.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
The opinions expressed by third parties are their own, and are subject to change at any time due to changes in market or economic conditions. The views are not necessarily shared by St. James’s Place Wealth Management.
2 Pensions Policy Institute, Supporting DC members with defaults and choices up to, into, and through retirement: qualitative research with those approaching retirement, 2015