Drawdown allows people to leave their pension invested and take an income from it when they need it. The investment element means it’s only suitable for those with a chunky pension pot, other income to fall back on and who are prepared to accept the risk of losses.
But the plunge in gilt yields that has sent annuity rates spiralling downwards has hit drawdown users too, because the maximum income they can take from their pension is dictated largely by annuity rates. They’ve also been affected by a government rule change last year that restricted the amount of a pension fund that can be taken as income. Many investors who began drawdown when gilt yields were at their peak in 2007 have this year, on their five-year review, suffered a 55 per cent cut in the maximum income they can take from their pension.
Drawdown is a logical option for a minority of affluent pension investors, said Carl Melvin, chartered financial planner at Affluent Financial Planning in Paisley. He pointed out that retirees are taking a risk whatever they do.
“The risk with annuities is dying too soon, but you are protected from investment risk. Drawdown offers flexibility, good death benefits and growth potential but you have to beware drawing too much income if growth is low.”
But low annuity rates may tempt too many people into income drawdown when they’re not suitable for it, he added.
“Drawdown does carry risks and the best option for most people would be the certainty provided by annuities – then all you need to do is keep breathing!
“I suspect that poor annuity rates are forcing people to use drawdown as they don’t want to lock into a poor annuity rate.”