The debate rumbles on. Will the annuity make the best comeback since Lazarus? What should we make of this grand shove into drawdown?
The not-quite abolition of the pensions death tax – for a couple of years yet there will be a 45 per cent tax charge on any inherited pot taken as a lump sum – provides a ready route for those wanting to pass on wealth through the generations: have the next generation take the income through drawdown.
I get a growing feeling there will be infinitely more products and methods and intricacies in this space than actual money to draw down.
Let us leave to one side for the moment that drawdown presents a massive potential headache to administrators, having sleepless nights at the prospect of never-ending requests for a little bit out of the rainy-day fund. “Send us £500, would you. I need a new wing mirror on my Lamborghini.”
Illustration by Ben Jennings
Is this an option for the majority? Let us consider the risks. After April, rather than purchasing a guaranteed retirement income, a newly retired DC scheme member decides to stay invested and draw some income.
Then the eurozone’s steady march into deflation coupled with monetary policy tightening from the US and UK and deepening geopolitical instability in eastern Europe and the Middle East bursts the equity market bubble.
The retiree had a somewhat diversified investment strategy, with equities, fixed income and even a small amount of alternatives. Problem is, markets prove the adage that diversification works except when you really need it to, and a chunk of their pension pot is wiped out. Not to mention the fees that have been made to the drawdown provider during that time.
This is obviously a worst-case scenario. There are no right or wrong answers here. In a market distorted by quantitative easing the trade-off is between security (annuity) and value (almost anything else), and neither side of the bargain holds great appeal.
But it remains to be seen whether income drawdown will ever prove the most sensible option for the majority, not just those with the largest pension pots able to stick the fees and ride out the peaks and troughs.
Ian Smith is editor of Pensions Expert. You can follow him on Twitter @iankmsmith and the team @pensions_expert.
