Calls for a default drawdown option are missing the point, argues Andrew Pennie, marketing director and head of pathways at Intelligent Pensions
The Work and Pensions Committee has called for the government to mirror the success of automatic enrolment by providing a default drawdown option for accessing pensions in retirement by April 2019.
Drawdown is a relatively complex financial product. Mistakes are easy to make, usually expensive and often irreversible. It is therefore not surprising that the WPC have some concerns about the growing number of people using drawdown without the benefit of regulated advice.
But, given everybody’s retirement will be different - ‘one size fits all’ solutions really don’t work very well for people looking to draw their pension benefits.
Unlike the accumulation phase, where default options can work reasonably effectively, there are just too many factors at play when it comes to how members may choose to retire.
Default models are likely to be very cautious”
Default drawdown models undoubtedly can be built, but which retirees will use them and will they be appropriate for their needs? Who knows! The provider won’t know and the user probably won’t know either and that doesn’t feel like a particularly great place for anyone to end up.
Default models are likely to be very cautious and play to the risk of someone running out of money. To mitigate this risk, the default will likely control the withdrawal rate and take a cautious investment approach. It will thus become more like an annuity but without the lifetime guarantee.
The true value of income drawdown is not avoiding an annuity, it is the flexibility to do things that an annuity cannot do – providing an ongoing solution that can adapt to the individual rather than follow a standard path.
A more personalised approach is therefore key to good member outcomes and the long-term success of pension freedoms
There are myriad reasons why drawdown might or might not be the right solution for someone and as many different ways that drawdown can be used to meet someone’s individual needs.
Default drawdown models must come with suitable warnings about the risks”
While a default drawdown solution might mitigate some of the drawdown risks we can’t expect it to deliver good outcomes for the majority of users, and for some it will produce very poor outcomes.
If default drawdown models are made available to consumers they must come with suitable warnings about the risks and limitations of such an approach.
In addition, and like any DIY drawdown solution, an unadvised default drawdown investor must understand they are carrying all the risk themselves. Conversely, consumers who take regulated advice will benefit from full regulatory protection and recompense should the advice prove wrong and result in financial loss.
I am still very much of the opinion that regulated advice is the key to pension freedoms success. Guidance and default options are unlikely to deliver good member outcomes for the majority and more needs to be done to make regulated advice more accessible and more widely used.
So back to where I started and using the immortal words of Edwin Starr, ‘Default drawdown - what is it good for? Absolutely nothing!’ Well, absolutely nothing is possibly a little bit harsh, but it absolutely isn’t the answer to ensuring people achieve better retirement outcomes or for securing the long-term success of pension freedoms.