“The more enlightened (or those with really good advice), will have phased their tax-free cash to avoid higher-rate tax.”
Yet the future may not be as bleak as these statistics suggest. Fiona Tait, technical director for Intelligent Pensions, comments: “The evidence suggests most people are not using it to withdraw large lump sums or excessive income.
“The majority are younger retirees, aged between 55 and 65, and may have a need for temporary or top-up income, rather than a sustained income for life.”
She points out that, as the average initial drawdown fund has fallen in value, this may mean people will still have earned income and other pensions that will be payable at a later date.
However, she accedes: “There are undoubtedly those who only have small savings, and would rather cash them in rather than purchase ongoing income.”
How providers have behaved
Annex 2 of the FCA’s Retirement Outcomes Review is quite telling. Of the 55 providers it analysed offering retirement income products in the year immediately after pension freedoms came in, the majority – 28 firms – offered drawdown only.
Three offered only annuities and none offered just blended products. Some providers offered both drawdown and annuities.
Figure 1, taken from the FCA document, shows the vast majority of available products being provided – possibly also marketed – are drawdown products.
Only nine providers created a form of blended product that sought to combine the best features of annuities with the best features of drawdown.
As shown in Figure 1, the majority of providers offered drawdown only (28 firms), followed by a number of providers offering both drawdown and annuities (15 firms).
What is a blended solution?
Blended solutions in a nutshell sound like a great idea. Although the detail is more complicated, and depends on the provider and the individual, a blended solution can be delineated thus:
• It is an annuity and a pension drawdown, with a cash account, held in one, tax-advantaged wrapper.
• Daily costs can be covered by a stable income stream on the one hand while, from the drawdown fund, investors can risk some of their pension pot in the investment markets.
• Income withdrawals can be started, stopped and varied. Income can be redirected into the plan.
• This product can accommodate those with medical or lifestyle problems as it offers enhanced annuity rates.
• It can also help people who want a competitive guaranteed annuity rate.
• Blended drawdown also provides comprehensive death benefits. Under current rules, on the drawdown side, the fund can be inherited in full (although subject to tax after age 75) while on the annuity side a guarantee can be put into place for up to 30 years which may provide ongoing income for the surviving spouse.
• A 100 per cent spouse’s benefit can also be provided.
