A mighty big shove into drawdown

The industry was still reeling from the Budget announcements for pensions reform, when yesterday the Chancellor once more waded in with changes. From next April payments from drawdown funds on death of the member will be tax-free if the person dies before age 75, and subject to either marginal rate of tax or 45% if the member was 75 or older.

This move, of course, appeals to many people's basic instinct to try to leave as much money as they can to their family. Even though the Treasury hurriedly reassured the industry that value protection paid out on death of an annuitant will also be tax free (if they die before 75), this still means drawdown compares very favourably against annuities when considering death benefits.

The obvious consequence is that although it has been predicted that many more people will go into drawdown after April, that number has swelled. This move, by the Coalition Government, is designed not to ‘nudge’ people into drawdown, but to ‘shove’ them right in.

And, I don’t believe that is a good thing.

There are well-documented risks with drawdown. The fund is subject to both investment risk, and the risk of people living longer than expected and therefore running out of money. (Although personally I think living longer than expected sounds quite good.) Drawdown is also expensive. Note there is no 0.75% charge cap on crystallised funds, unlike the one which will exist on accumulation funds. And guarantees on drawdown sound great, but could cost the earth. Put simply drawdown is not the right solution for everyone, or at least with all of their fund. It depends greatly on their personal and financial circumstances, the ongoing advice and help they receive, and their attitude to risk.

Now, don’t get me wrong. I love the idea of greater pension freedom. I love the idea of less chance of paying tax when you die. But I also think annuities are a good product for a lot of people, and I want people to take them out, with at least part of their fund, or at some point in retirement. I want them to have security. I want them to have an income that is guaranteed no matter what. Annuities can be - and should be – improved, but there is absolutely no reason to bin them altogether. They play a vital role, especially when combined with drawdown. But the pendulum is in danger of swinging too far the other way in drawdown's favour and eliminating people's want for annuities.

So instead I would like to see a more even playing field. Change the rules so dependants’ annuities are also tax free (if the member dies before age 75). And make sure value protection lump sums are also subject to marginal tax (rather than 45%) if the member dies after age 75.

Because this boils down to one question. Are we completely happy that all the people use all their retirement fund all the time to invest in drawdown? And if we’re not – and I for one am not – then we need to create a level playing field so both drawdown and annuity can work together to provide people with a secure, but aspirational, retirement income.