Difficult conditions in the income drawdown market mean some clients can now get more income from a standard annuity. Helen Morrissey looks at what this means for the industry
The issues facing income drawdown have been well publicised. Volatile investment markets, falling gilt yields and the decrease in maximum GAD have conspired to give many retirees a nasty shock when they have an income review with their adviser.
The industry has lobbied government to try and ease the situation. In September 2011 AJ Bell's chief executive Andy Bell sent a letter to the Treasury requesting the 120% maximum GAD limit be reinstated as well as a review to establish whether gilt yields are the best way to calculate drawdown income.
While the initial letter was swiftly rebuffed Bell was prompted to write another letter in July. In it, he heralded new troubles ahead for the income drawdown market by saying that in some cases the income clients can get from standard annuities is now higher than that provided by drawdown.
The letter said: "I totally support the principles the Government outlined in their previous communications with me, but feel that evidence from the market, showing that even standard annuities are now providing higher income than the maximum income available under drawdown proves that the balance between flexibility and risk mitigation has tipped too far in the latter direction. I also believe that any concerns about excessive depletion of drawdown pension funds are imagined rather than real."
So is it the case that the retirement income balance is swinging in favour of annuities? If so, what does it mean for the income drawdown market?
AJ Bell's argument is upheld by many in the industry according to AJ Bell marketing director Billy Mackay.
"The current situation adds weight to the long argued point that perhaps we should move towards a fixed percentage rate depending on the age of the person in drawdown," he says.
"While it is only an issue for those drawing an income at or near max GAD we are getting a lot of support from advisers. Many are going to talk to their local MPs about the issue and I think it is something that will gain momentum."
Primetime Retirement's marketing director, Stuart Wilson believes there needs to be more flexibility in the market.
"We fully endorse the views of Andy Bell calling for more income drawdown flexibility," he says.
"There is evidence that even standard annuities are now providing higher incomes than the maximum income available. .... We believe that a relaxation of the rules should bring more tax revenue to the Treasury and get people spending. With gender equalisation fast approaching, we should see a fairer form of drawdown but retirement income providers need to address this new situation swiftly."
Wilson added that the shift has also seen the gap between annuities and fixed term annuities become narrower and this will be further shortened with the impact of Solvency II and gender neutralisation. He believes fixed term annuities will become an increasingly creditable option for advisers to discuss with their clients.
While Hargreaves Lansdown's pension investment manager, Laith Khalaf agrees we are seeing increasing parity between the income clients can get from income drawdown and standard annuities he says this is a result of the change in income drawdown's function over the years.
"In some cases you can see the income taken from an annuity exceeding that of drawdown but it all comes down to the decrease in maximum income from 120% maximum GAD to 100% last April," he says.
"This is all part of the abolition of compulsory annuitisation and the extension of the income drawdown market. If people are going to stay in income drawdown longer then there does need to be a lower maximum income taken."
However, AJ Bell's Mackay disputed whether drawdown clients were actually depleting their funds.
"There is little evidence that people are depleting their funds," he says. "I know one piece of research suggested there was a 36% chance of people depleting their funds but this did not take into account the three year reviews so we think it is harder for people to deplete their funds than has been suggested."
What should be done?
So how are clients reacting to this news? Will we see them forsaking income drawdown and taking a flight towards annuities or will they keep the faith with their drawdown portfolios?
Research commissioned by Primetime Retirement showed 79% of intermediaries anticipated an increase in the number of clients asking for advice on annuities over the next twelve months.
The research also showed 77% expected the fixed term annuity market in particular to grow over the coming two years.
"We do have clients coming to us who have had a rocky time in income drawdown," says Primetime's Wilson.
"Once you start taking an income then risk takes on a different look and feel and you can struggle to make up lost ground in difficult markets. It would be a shame if clients were put off going down the drawdown route because they are having their incomes squeezed and we need to offer people as much choice as possible."
However, despite these issues many in the industry believe income drawdown will remain an important part of client's retirement planning strategies.
"With continued quantitative easing we are seeing difficult times for retirees but income drawdown remains a viable option for many clients," says Almary Green managing director Carl Lamb.
Dentons' technical services director, Martin Tilley agrees: "Income drawdown is still an optimal tool for retirees to use until the best time comes to purchase an annuity. We need to remember that the issue with annuity purchase is that once you are locked in then you can't change whereas at least we have the 2% floor with income drawdown and things will get better."
Hargreaves' Khalaf agrees things will improve and pointed to the fact that things are hardly rosy in the annuity market either.
"In terms of the income drawn then there's not a lot that can be done," he says. "If we see a situation where gilt yields start rising then we may see an increased demand for interim reviews. It's also worth pointing out annuities are also at low rates so many people still will not want to lock into them."
He also pointed to several potential opportunities on the horizon that advisers need to consider: "We have the gender ruling in December and we will see male annuity rates fall so those thinking of taking an annuity will need to take that into consideration," he says.
"HMRC has also said income drawdown rates will be affected with women's rates being moved up to those of men. We can expect this to be reviewed but there is certainly a window of opportunity there."
So it is clear that advisers will be increasingly careful when helping clients to make retirement income decisions. Income drawdown reviews may result in disappointing income for clients right now but circumstances can change and clients may regret locking into an annuity right now.
"In the short term the outlook is glum but income drawdown is still an important tool and gives the retiree all important choice as well as control of capital," says Dentons' Tilley. "We are in a very dark period for retirement income but we are riding the storm."
It will be interesting to see how drawdown clients react to the difficult conditions ahead. While some will decide the time is right to annuitise others may choose to go down the fixed term annuity route.
However, it is likely the vast majority of them will choose to stay where they are. Reviews with their adviser may prompt them to take less income from their pot until conditions improve.
Some may even stop taking income from it at all but it looks likely that many continue to believe income drawdown remains the right option for them and are happy to wait until the balance of income swings back in their favour.
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