Consumers who choose drawdown tend to do so because they like the flexibility it offers, but there are associated risks, especially when the drawdown has been without advice.
A blended solution – whereby a portion has been set aside to provide a stable income stream – can act to help minimise risks to the whole pot, but there are no guarantees.
While having such a stable element in the retirement income can increase certainty, removed from the vagaries of the stockmarket, there is no absolute guarantee that the drawdown element of the portfolio, which remains invested, will not be hurt by any sudden, steep and protracted market drop.
Complication
Wrapping one’s head around stock market performance, sequencing risk and portfolio performance can be pretty complicated.
So the first risk to consider is just how much an uninformed individual can understand their own pension plan, and how it will be affected by exogenic shocks and personal circumstances.
Add to this complexity the fact there is no guarantee the individual will not live longer than expected, suffer a dramatic change in circumstances, take out too much money or incur a tax event, and it is clear there are a lot of factors to assess.
Creating a suitable, blended solution for retirement, and ensuring it remains suitable through all the changing scenes of life, is complicated enough even for a qualified financial adviser, let alone an unadvised pensioner unfamiliar with the intricacies of pension planning.
William Burrows, retirement director for Better Retirement, explains: “Drawdown is a complicated thing to manage properly because a good adviser will be watching fund performance, any changes in attitude to risk or personal circumstances, as well as monitoring annuity rates.”
He adds: “This is probably one of the most difficult areas in personal planning and customers without advice simply cannot spin all these plates in the air without the fear of them crashing down.
“Non-advised customers need all the help they can get.”
Tax risk
Femi Folorunso, senior consultant for Mattioli Woods, warns clients could potentially face the hazard of taxation.
He explains: “For clients with substantial personal wealth, in some cases, it may be more tax beneficial to drawdown on personal funds initially before accessing their pension, because of the inheritance tax treatment of pensions.
“For others, drawing down income may create higher income tax liabilities than anticipated, or limitations on how much they can contribute into a pension scheme as a result of the money purchase annual allowance (MPAA).”
Mr Folorunso says as a result, this could make it less possible for individuals to manage earned income tax liabilities through pension contributions.
Too much too early
“The greatest consumer risk of not taking advice when entering income drawdown is running out of money too soon,” according to Fiona Tait, technical director for Intelligent Pensions.
