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Tim Leonard

Tim Leonard

Finance Expert
Published: 09/08/2017
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Retirees making use of the pension freedoms to access their pension pots have been urged to shop around for their drawdown and annuity plans and seek advice.

According to a recent report by the Financial Conduct Authority (FCA), accessing pension pots early has become "the new norm" following the introduction in April 2015 of the pension freedoms, which effectively removed the obligation to buy an annuity, and gave pensioners unprecedented control over their pension savings.

In the subsequent two years, the financial watchdog says that drawdown - where the pension pot remains invested and an income is taken directly from it - has become much more popular than buying an annuity, which can provide a secure income for life. Indeed, twice as many pots are now being moved into drawdown than annuities, compared with 90% of pots moving into annuities and only 5% into drawdown before the pension freedoms.

The potential benefit of drawdown is that as the rest of the pot remains invested, it will continue to benefit from any investment growth; however, the potential danger with drawdown is that without careful management the pot could be quickly exhausted, as a result of taking too much income and/or because of a fall in the markets.

Yet despite such considerations, the FCA says that individuals are increasingly accessing drawdown without taking financial advice. Before the freedoms, the regulator says just 5% of drawdown was bought without financial advice; the latest figures suggest this has now reached 30%.

Also of concern was that individuals who had accessed their pensions early without taking advice had typically taken the 'path of least resistance' and purchased drawdown from their current pension provider, without shopping around. Indeed, data from the report shows that 94% of non-advised drawdown sales were made to existing customers, whereas when advice is given the proportion of drawdown sales to existing customers drops to just 35%.

Unfortunately, it is an all too familiar problem for a retirement industry that has long tried to espouse the benefits of searching for the best deal when it comes to purchasing an annuity .

"For those people looking to generate an income, the market has swung towards drawdown, but the lack of shopping around pervades the market and is an issue whatever product you choose," said Andrew Tully, pensions technical director at Retirement Advantage.

"We've highlighted people can lose £8,460 in income over the course of an average retirement by not getting advice and securing the best annuity for their circumstances. While drawdown is not a one-off purchase like an annuity, it is still important people look around for the right product, as you can easily find yourself caught out by high charges."


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