After a lacklustre start, flexible drawdown is now coming into its own, writes Claire Trott, pensions technical manager at Suffolk Life
It is safe to say flexible drawdown did not have the explosive launch that was expected, initially being seen as only for those wishing to liberate their funds from the restraints of a pension.
Since then, advisers and clients alike have seen what flexible drawdown is really capable of. This has seen an increase in the number of self-invested personal pensions (SIPPs) and personal pensions either moving from capped drawdown or crystallising straight into flexible drawdown.
Why the rise in interest?
There are many reasons why there was originally so little take up, not least the need to plan. Getting all the pieces in place and the advice process completed takes time.
Clients need to be clear what they are giving up for the flexibility that this type of drawdown offers; some still may want to contribute in future years. This, although possible, is really not something many would advise their clients to do. Clients do not have an annual allowance going forward which, at best, would mean personal contributions are effectively paid gross. At worst, employer contributions would attract an annual allowance charge, which is an income tax charge paid personally.
The removal of the age 75 rules has also had an impact on the use of flexible drawdown. Many clients still do not want to purchase an annuity at 75 and feel that their funds are being locked in by the reduced income level of capped drawdown. As they get older they may wish to have the increased flexibility to take income as and when they need it and to draw on their fund before they die. The capped drawdown rules are seen by some as more protection than needed.
Take, for instance, a person who is hitting 75 now. They are of the generation who are likely to have a final salary scheme that will have been in payment and receiving increases for ten years now. If they have been able to pay into a SIPP alongside this, they are likely to already meet the minimum income requirement using both the final salary scheme and their state pension.
This gives them the flexibility to take their SIPP benefits in the most tax efficient way for them, whether that is drawing an increased income and gifting it to their grandchildren, using it for increased care costs for them and/or their spouse or something else.
Little needs to be said about the massive reductions those in capped drawdown have seen, even for those that have maintained their fund value over the last five years. This is another reason clients are moving into flexible drawdown, just to maintain their standard of living. If their investment portfolio can support that level of income they do not feel that they should be restricted.
Not all flexible drawdown options are equal. One product is not always better than another – it depends on what the adviser and client wants to achieve.
Those looking to strip out small funds need a provider with low up-front costs, likely low or no minimum fund values and a cash account. It would not be ideal having to invest in an insured fund just to disinvest it again to do the withdrawal. That would likely add extra costs, time and hassle.
If the client wants to invest for the longer term, maybe with a view to partially crystallise over time to protect lump sum death benefits, the initial costs of the provider may not be such a concern. It is important to know that the provider can administer a partial approach to retirement in the way that is wanted.
Fees, obviously, do need to be considered, especially the way in which they charge for income and crystallisation for instance, but, over the longer term, thinking about levels of service may be more important.
We are often asked if the things flexible drawdown is being used for will be frowned upon by HMRC – and do we see this flexibility being able to continue?
Simply, the answer is yes, we do. With flexible drawdown being an extension of capped and the safeguards that are in place, advisers are not exploiting the option but rather using it to give their clients the best retirement they can.
There are many contracts on the market to suit the different requirements of clients and more will become available as flexible drawdown becomes more mainstream. One size does not always fit all, even when it comes to drawdown.
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