besides their pension . This remains true in the advised market , where 26 per cent of IFAs insist their clients have more than £ 100,000 of assets and 27 per cent insist they have more than £ 200,000 , according to Never Mind the Quality , Feel the Width 3 , a recent report from independent financial services consultancy The Lang Cat . There is little by way of shopping around for the best deal , either , with 94 per cent of consumers who enter non-advised drawdown doing so with their existing provider .
“ They simply want tax-free cash and not to think about the rest for now ,” adds McPhail . “ In fact , many don ’ t even think of themselves as ‘ in drawdown ’,” which , he says , can present its own problems .
WHEN CASH AIN ’ T KING This is because drawdown isn ’ t an insurance policy , but an ongoing investment strategy . If you intend to stay invested and decide not to take an income , the existing accumulation strategy may suffice for some years . If it is your sole source of retirement income , you may want to consider whether you can live with the present levels of volatility .
Income drawdown does not operate like your general investment account . As an income product , there is likely to be a requirement to hold more cash than you may wish .
It is common for the drawdown product to hold in excess of a year ’ s income in cash so it can pay out a regular amount , meet any fees and avoid becoming a forced seller if liquidity dries up . Data from The Lang Cat even shows 23 and 32 per cent of advisers holding a minimum of 12 and 24 months ’ cash in their drawdown products , respectively .
Cash may not be as volatile as some other asset classes , but it is guaranteed to provide a negative return as there are no savings accounts capable of beating current rates of inflation without tying up your money for at least three years .
Principal at The Lang Cat Mark Polson says that where reviews are undertaken , they tend to be backward-looking and there is little management of volatility . “ This means that investors with significant assets should be managing their drawdown very closely ,” he adds .
CHARGES Cash is not the only potential drag on drawdown . Just as many investors fail to differentiate between saving for a pension and starting drawdown , advisers largely fail to differentiate between charges in the accumulation and drawdown phases of a pension .
“ The same fee model is often applied , meaning the cost is typically 1.8 per cent to 2 per cent and anything up to 2.5 per
As an income product , there is likely to be a requirement to hold a lot more cash than you may consider sensible
cent including other charges ,” says Polson . “ The industry is very good at creating incentivised accumulation products , but not for those who want to take the money back out again .”
In this “ lower for longer ” investment environment , if you generate 5 per cent net of fees a year and are withdrawing 4 per cent as income – a typical amount many advisers would be satisfied with if you have sufficient funds – your pension pot will still lose money as inflation is running at more than 3 per cent .
Burrows ’ view is that if you want an annuity , you should look for the purest one you can get to maximise the income . However , drawdown is an investment proposition and you need to invest where you feel it is appropriate .
NON-ADVISED IS NOT NECESSARILY CHEAP Although many consumers distrust advisers , Burrows cautions against rejecting the advised route on the basis of cost : “ In the eye of the customer , a non-advised sale is free , but it couldn ’ t be further from the truth ,” he says .
Quite often a non-advised annuity or drawdown sale may attract fees of 2 to 3.5 per cent ( your author discovered one example of 4 per cent being charged for a drawdown before the tax-free lump sum of £ 60,000 was withdrawn ). Meanwhile , defined benefit ( DB ) transfers are being undertaken for around 3 per cent .
“ Non-advised drawdown platforms have their own expenses , but customers have to realise they ’ re on their own ,” adds Burrows . “ They may feel it is better to pay a fee to keep someone
with a watching brief over it , as if anything should go wrong , the detriment is likely to make the fee look insignificant .”
Charges are fairly competitive on new drawdown products , says Burrows , but older ones can be expensive , inflexible or may even perform poorly , as the regulator pointed out this year .
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