Stewart Dick looks at some of the factors contributing to a rise in use of flexible drawdown.
It is perhaps not surprising that the widely predicted boom in flexible drawdown has failed to materialise so far.
A 50% top rate of income tax, a lack of interest from the big providers and a wait-and-see attitude from some clients and advisers have all combined to turn the much-trumpeted arrival of flexible drawdown into something of a damp squib.
So why are providers now beginning to detect a change of heart, manifested both in an increase in clients preparing to switch from capped drawdown, and from SIPP and personal pension investors looking to crystallise straight into flexible drawdown?
The reduction of the top rate of income tax from 50% to 45% from April is certainly a factor for any high earners looking to withdraw all or a large portion of their pension pot.
But arguably a more important reason why flexible drawdown is coming back on the agenda is a growing understanding of the real value-adding opportunities it offers advisers, particularly when combined with phased drawdown.
For individuals who have no pressing need for their tax-free pension commencement lump sum, phasing drawdown from the defined contribution pot means almost £50,000 income can be drawn without paying tax at the higher rate of 40%.
Because the remainder of the fund remains uncrystallised, using flexible drawdown in this way means tax-free lump sum death benefits can be maintained up to age 75. This combination of flexibility and tax efficiency must surely grow in popularity as IFAs look to demonstrate their value in a post-RDR world.
The decision of big life insurers to finally offer flexible drawdown is also bound to add to the momentum. Life insurers that shy away from offering flexible drawdown purely because it allows large amounts of their funds to walk out of the door will look increasingly isolated as flexible drawdown becomes more commonplace.
More providers will lead to increased competition, hopefully ultimately driving out exit penalties, depletion fees and charges for the residual fund falling below a certain level, all of which should lower further the barriers to opting for flexible drawdown.
Then there are the cost savings of going into flexible drawdown. Once you have made the leap across you no longer have the cost or hassle of formal triennial reviews.
So what of the future? There are forces that will pull against greater uptake of flexible drawdown. The government's decision to revert to 120% of GAD will certainly loosen the purse strings of capped drawdown investors a little.
Changes to state pension will also affect uptake of flexible drawdown.
Meeting the minimum income requirement before state pension kicks in is considerably more expensive than afterwards, so as state pension age gets later, so too will the date many individuals will be able to take advantage of it.
Pension minister Steve Webb's flagship flat-rate state pension will also probably influence flexible drawdown take-up. A high earner reaching state pension age today can expect a state second pension of around £8,000, on top of the £5,587.40 basic state pension. Giving everybody a single flat-rate pension of £8,000 would put make it harder to reach the minimum income requirement, although it would be many years before the full effect of this would be felt.
But that is likely to be more than outweighed by the general growth in DC pots and trend away from annuities, which has been compounded by low interest rates and last December's ban on gender underwriting.
It is a view backed up by a Pensions Policy Institute's briefing note on flexible drawdown published in December 2011 which argued that around 200,000 people were in a position to use flexible drawdown in 2010, but 500,000 could by the time they reach state pension age.
The direction of travel is clear. As DC pots grow, flexible drawdown will become the norm for the increasing proportion of the population that can afford it. As provider-imposed impediments to taking the flexible route are removed, it is hard to see why it would not.
Stewart Dick is head of sales at Hornbuckle Mitchell
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