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16 March, 2015   |   By Jonny Paul - FT Adviser   |   Market News


Who should go into drawdown - and who should not? There is no deadline, expiry date or obligation to withdraw from pension pots when 6 April comes around.

Most over-55s are likely to be in bed or getting rained on with their grandchildren on a beach somewhere when the pension freedoms come into effect on Easter Monday , if they heed the advice of pensions minister Steve Webb. 

He makes a fair point: there is no deadline, expiry date or obligation to withdraw from pension pots when the clock strikes midnight on that spring morning. 

“People should take their time, seek advice and make informed decisions,” he says. The mantra is that we are living longer and much forethought must go into retirement planning to ensure a sustainable income source throughout.

Considering the likely shift of default option from annuity to unfettered drawdown, the risks of that planning not working out and the pot running dry (or at least such that whatever the objectives they may not be met) will shift to individuals and their advisers. 

Who will go for drawdown?

Flexible access drawdown, the new basic income option that replaces flexible drawdown and removes its minimum income threshold, allows you to take as much income from your plan as you like and to vary it as you see fit. 

The afforded flexibility, continuing low interest rates and lack of confidence in traditional income sources means it will be the popular choice. So how will it pan out post-April 6: who is FAD suitable for, at what income level, and who not?

Since the pension changes, a number of firms have lowered their minimum pot size to £30,000 - picking up where the trivial commutation limit leaves off. 

The Association of British Insurers recently revealed that in Q4 2014, the number of drawdown contracts sold by its members more than doubled compared to the same period in the previous year to 11,454, while average pot size fell more than 30 per cent from £83,400 to £57,600. 

Balancing act

Those who go into drawdown they must be comfortable remaining invested and have the requisite tolerance for risk. Advice is strongly recommended by most - though there are more non-advised options coming to market - as is monitoring fund performance. 

David Trenner, technical director of Intelligent Pensions, said FAD should only be used to provide sustainable income, although could be useful if a lump sum is needed if getting a loan at reasonable rates is difficult. The tax-free option should only be used to clear borrowings, he added.

“For people who rely heavily on their pension funds to supplement their state pension and provide the basic necessities, FAD is not suitable. These people may believe annuities are not for them, not least because they underestimate their life expectancy,” he says.

Not black and white

A third way is becoming increasingly apparent for those in Mr Trenner’s conundrum. Not ‘either, or’, but ‘and’: the age of the blended solution may be coming.

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