John Moret discusses the implications of the new drawdown regime, suggesting a more illustrative pensions systems.
Welcome to a new era of drawdown pensions. The requirement to purchase an annuity at age 75 has gone (forever, one assumes) and we have two variations on the drawdown theme: capped and flexible.
I don't intend to go through the details of the new regime as these are readily available from many different sources. Although, I would assume all advisers will be familiar with the rules as they affect all current users of the old USP and ASP regime, along with clients looking at their retirement options for the first time.
Advisers are already faced with a dilemma as many providers of USP and ASP have delayed offering flexible drawdown. Indeed, I know of at least one that has also deferred introducing the age 75 extension, forcing clients to either go into drawdown or transfer to another provider before age 75.
The late changes to the use of scheme pensions for meeting the Minimum Income Requirement (MIR) under flexible drawdown have added a further degree of confusion and uncertainty.
All of this suggests to me that it would have been in everyone's interest - apart from those reaching 75 in the next 12 months - if these changes had been deferred until 2012 when coincidentally flexible drawdown could also include protected rights.
Given the uncertainties, it's hardly surprising that the FSA appears to have adopted a minimalist approach in its changes to the Handbook rules to cater for drawdown pensions.
Most of the changes, which were confirmed in chapter five of the FSA Handbook Notice 108 published just a few days before the new drawdown regime went live, are cosmetic. But there is one area which gives me real concern and that is the area of illustrations.
The FSA states in Notice 108 that it does not believe "it is necessary to treat capped and drawdown pensions differently for illustration purposes as the risks are the same."
Consequently, even where the MIR is satisfied as long as there is capital remaining in the fund, a projection for flexible drawdown must include the maximum initial income using GAD factors.
This seems a meaningless and potentially confusing requirement. While it is very clear that the risks associated with flexible drawdown need to be emphasised, it is surely not a justification for producing a paper mountain of figures which bear little or no resemblance to the likely outcome.
However, my main argument is that given the radical changes to the pensions legislation, there is a need for a similarly radical review of the whole illustration and projection regime for drawdown pensions.
The continuing use of deterministic illustrations assuming a static rate of investment return defies reality. The impact and timing of withdrawals can radically alter a clients outcome. For example, calculations show that for the same client aged 65 making the same -annual withdrawals and achieving the same average annual investment return, the longevity of the fund can be extended by 14 years - from age 81 to age 95 - simply as a result of the incidence of different annual investment returns.
What is now needed is an illustrative regime which is less reliant on number crunching, but instead provides a more valuable indication of the sensitivities of changing investment returns on the client's fund and annual income.
The decisions for clients don't get any easier with the new regime - particularly as longevity trends continue to increase.
Unfortunately, the FSA states in Handbook Notice 108 that it has no plans to undertake an overall review of the projection requirements for pension drawdown.
I fear that could be a serious misjudgement as despite an apparent lack of enthusiasm for flexible drawdown among providers, I believe the take-up of this new option will exceed initial estimates over time. Indeed, if a client can satisfy the MIR now, surely he/she should be recommended to elect for flexible drawdown rather than capped drawdown as there don't appear to be any downsides.
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