As financial advisers increasingly look for alternative solutions to provide customers with the most beneficial retirement income, investment business Skandia has revealed a rapid rise in flexible drawdown business on its platform pension, the Collective Retirement Account (CRA).
Since its introduction in 2011, flexible drawdown has provided eligible consumers with a viable alternative to purchasing an annuity. Skandia has seen business in this area increase by more than 200% over the last 12 months, with over 1,000 flexible drawdown cases now written on the CRA
Retirees and their advisers should address three key risks when developing a retirement income strategy, longevity, sustainability and inflation. Annuities, that provide a fixed level of income for the remainder of life, are the most popular way of providing income from pension savings, but do not automatically take inflation into account, unless clients are prepared to accept a significantly lower level of starting income. Currently most of the 400,000 people entering retirement each year select this approach. However, assuming inflation at 2.5%, the 50% of male 65 year olds who go on to reach aged 85 will see their annuity’s value reduced by 40% in real terms in that time*. Even at this historically low inflation rate, a loaf of bread will cost in excess of £2.10 in 20 years’ time.
Flexible drawdown is available to people who already have a secure pension income in place of at least £20,000. Once this is secured from the state pension, a pension annuity or a company scheme pension, people can withdraw as much as they need from additional money purchase pension savings. There are no annual income limits as there are for capped drawdown and their remaining money stays invested to rise or fall in line with the performance of the investments selected.
Flexible drawdown can be used to phase in the use of untouched money purchase savings to provide additional income more tax efficiently than capped drawdown as and when needed, ensuring clients keep as much of their pension savings as possible to pass onto beneficiaries in the event of death before age 75.
It also avoids the ongoing complex legislative changes that impact the maximum income available through capped drawdown. This enables clients and their advisers to look at pension savings as an asset alongside other savings when reviewing what assets should be used when, to meet future income needs.
Adrian Walker, pensions expert at Skandia, comments: “It is clear that financial advisers are increasingly taking a broader view of their clients retirement needs, and as such are welcoming the more flexible solutions that are available.
“One of the reasons for our increased activity may be the higher number of individuals reaching State Pension Age. Some of these people will be receiving the most beneficial levels of State Pension provision, potentially coupled with final salary company pensions. This combination will provide an underpin of secure income that will make them eligible for flexible drawdown.
“We are encouraged to see more people looking at flexible drawdown to provide a suitable income in retirement from their money purchase pension savings and see this is an important first step in the industry moving away from viewing annuities as the ‘default’ solution.”
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