Pensions freedom was supposed to herald a levelling of the playing field when it comes to accessing retirement cash.
Previously, only the wealthy could use pension drawdown (where the pension remains invested and an income or lump sums taken from the pot as needed) while those whose pensions were too small to use drawdown had to make do with an annuity.
By doing away with the 'minimum income requirement' on drawdown, politicians believed they were unshackling less wealthy pensioners from the tyranny of annuities and giving them the chance to become an investor in retirement.
While they may have succeeded in the first – no one has to buy an annuity now – have they really succeeded in the second?
Research by consumer group Which? Has shown that a £250,000 pension pot invested in a drawdown fund and 6% income taken a year could result in charges of up to £26,490 over a decade. Granted this is a worst case example but the best scenario sees a retiree paying out just over £16,000 in 10 years – not an inconsiderable sum.
What these figures say is that although everyone can now access drawdown, the cost of doing so may be too much to bear for some pension pots. Keep in mind that while a £250,000 pot may seem a lot in the example it would generate an income (if you bought an annuity) of around £12,500 a year.
Suitable for the wealthy?
The hefty cost of drawdown means that in many ways it is still only suitable for the wealthy. It also shows just how behind the insurance industry is when it comes to developing straightforward, easily-accessible and affordable retirement products for the mass market.
Don't get me wrong, it's not the entire financial services sector that is woefully behind. There have already been some interesting flat-rate drawdown launches from companies trying to fill the gap that pension freedom has opened up.
Unfortunately, part of me wonders whether retirees who do opt for drawdown are ready not just for the cost of the product but also the cost of advice they will inevitably need to take further down the line. Drawdown is not a one-and-done decision that retirees can make. They will need to ensure they are happy with their investments even as they age and their risk tolerance likely decreases, they will have to work out the impact on their fund and income if an unplanned expense such as long-term care happens.
Drawdown comes with a number of costs and until the industry are able to supply it at low-cost, then it will still be suitable mainly for the wealthy.
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