Paul Lewis, presenter of BBC Radio 4’s Money Box, has spoken of his fears about the suitability of many of the drawdown contracts being purchased by those seeking to access their pension funds, suggesting that retirement savings could instead be invested in cash accounts to reduce the risk the monies are exposed to.
Drawdown has become increasingly popular as traditional annuities are now seen as representing poor value. Of the 204,581 people who accessed their pension savings between April 6 2015 and July 5 2015, only 12,418 (6.1%) purchased an annuity – this figure is less than one seventh of the number of annuities purchased in the equivalent time period in 2013. Whereas an annuity simply pays a set income for life, with a drawdown policy, pensioners can withdraw (draw down) as much of their fund as a lump sum and/or income as they wish at any time. However, there is an added element of needing to predict how long they will live, and ensure that they retain sufficient funds to see them through the later years of retirement.
Mr Lewis commented that most customers entering drawdown invest in risky, equity-based funds. He remarked on the recent falls in global stock markets, and that tracker funds – those that shadow the movements of major stock market indices – had fallen in value by an average of 16% between March and September 2015.
At the FTAdviser Retirement Freedoms Forum, Mr Lewis said:
“[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][Drawdown] is not what you want in life. You want certainty, not risk.”
He then went on to promote cash accounts as an alternative, by saying:
“The one thing we know about cash is you go to the bank, put £10,000 in your savings account and in a year’s time you get your £10,000 back plus £200. You have still got your capital, and a little bit more, and you have done no work. Fantastic.”
An apparently low-risk cash account can still expose an individual to inflation risk – the risk that inflation will be higher than the interest rate on the account and thus reduce the value of the savings in real terms.
Mr Lewis described drawdown as “a potential mis-buying scandal.” Drawdown can certainly be mis-sold by financial advisers unless they take care to follow these guidelines:
• The adviser should consider whether drawdown is suitable at all – regardless of the investment funds recommended, if a client has a cautious risk profile, it may not be appropriate to recommend a product that carries the risk of them running out of money later in retirement
• The adviser must make an assessment of how much they believe the client should access as a lump sum and as income – if an adviser recommends a client accesses too much, then the individual risks being much poorer in later years. It may be best advice for some clients to recommend that they do not draw down any of their funds, and instead leave them to grow
• The adviser must recommend where to invest the funds not being accessed – fund recommendations must be compatible with a client’s attitude to risk and capacity for loss
• Drawdown case files should always evidence why it was deemed to be a more suitable option than the various annuity options available
• The tax implications of any recommended course of action must be carefully explained.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.