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The wrong kind of pension drawdown

Unsophisticated investors face being enrolled into risky drawdown plans. New prod-ucts may be well-intentioned but need suitable risk controls. One-size-fits-all solutions could leave many investors with poor outcomes. Tom McPhail, Head of Pensions Research. Hargreaves Lansdown.

New post-Budget drawdown and investment schemes are now starting to be rolled out to the market. Unsophisticated investors face being ‘enrolled’ into risky drawdown plans without any understanding of how the arrangement works. Hargreaves Lansdown has operated a low cost drawdown plan for 8 years now, we also operate a whole of market annuity service, the largest of its kind in the country, so we know a thing or two about how to help investors get the best out of their pension fund at retirement.

 There are myriad examples of actuaries and other experts getting their sums wrong over the years, including with-profits funds, final salary schemes, Dutch CDC schemes and precipice bonds. It’s not so much a question of if something goes wrong as when. Tom McPhail, Head of Pensions Research: “It is no good telling a scheme member in ten year’s time that you’re sorry she’s run out of money but there’s nothing to be done because she went into ‘the wrong kind of drawdown’. Whatever solution an investor ends up with, they have to be made aware of all the risks involved. Whoever is providing that solution has to take responsibility for ensuring investors aren’t exposed to inappropriate or unexpected risks.”

 “If drawdown was risky for investors before the Budget, is there any reason why it isn’t risky now? Putting an insurance company or trustee body behind the risk doesn’t eliminate it, the risk is just moved somewhere else. Investors have to understand what those risks are if they are being signed up to them.”

It is imperative that all ‘decumulation’ solutions are regulated the same, whether they are annuity purchase, drawdown or Unsecured Funds Pension Lump Sum, from a contract-based scheme or a trustee administered scheme. Tom McPhail: “There is no one-size-fits-all retirement income product. The only way to ensure investors get a good outcome is to engage with them and walk them through a range of solutions, ensuring they understand the risks and benefits of the options they choose.”

 

 

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