The drawdown opportunity
The baby-boomer generation has finally started to reach retirement age, with more than 800,000 people enjoying their 66th birthday this year. Hundreds of thousands of retirees, often accompanied by significant pension savings, will require advice on how to plan their retirement.
The sheer number of baby boomers isn’t the only difference; they also have greatly improved mortality rates. Today there are around 464,000 pensioners aged 75 but over the next 10 years their number is expected to swell by more than 50 per cent.
While the focus is on drawdown, it will not have escaped advisers’ attention that there is also a huge swell of population peaking at around age 45. They will need advice on their retirement just as much; with 20 years or less accumulation remaining, they are likely to have much poorer retirement provision than their parents.
Flexible, not feckless
The return to maximum 120 per cent Gad income limit returns a very useful tool to advisers for their clients. There is a false impression that drawdown investors take the maximum income possible, yet the evidence is that very few do so. In fact, there are probably more drawdown investors taking no income at all than those drawing their maximum.
Flexible drawdown’s unlimited withdrawal backed by other minimum levels of secure income has, to some extent, shown the way for capped drawdown to follow. Advisers will have different views on a recommended level of income to be drawn but there is a constant in all but a handful of cases – it is below the maximum. Planning ahead for income well below the maximum encourages a higher level of saving. It also allows for far greater flexibility to take larger one-off withdrawals on demand in the future.
More than income
For all the flexibility afforded to income withdrawal, it is the other features of drawdown that are likely to be of equal appeal to the drawdown clients of tomorrow. They are often taken for granted, yet with increasing life expectancy they should be anything but:
• Remaining invested for longer. Although there are attractions to crystallising a retirement position, it is increasingly disingenuous to completely de-risk a retirement that could last two or more decades.
• Remaining uncrystallised for longer. At least up to the age of 75, the ability to pass uncrystallised funds free of tax on death is extremely valuable.
• Passing on the fund to a spouse, or not. Bypassing a spouse is becoming an increasingly important feature of how drawdown is used.
• A need for ongoing service. The opportunity for advisers to continue to add value to their clients’ retirement in the decumulation phase.
