We've waited years for flexible drawdown. So why doesn't your pension provider offer it?
Starting from April last year, a rule change meant that pension savers could take unlimited income from their pension, provided that they had a guaranteed lifetime income in place of at least £20,000 -- a figure that includes the state pension, workplace pensions and any existing annuities.
Which was very welcome news to many people, bringing with it an end to compulsory annuitisation at 75.
And with traditional 'capped' drawdown limits -- designed to prevent your pension from expiring before you did -- being hit heavily by falling gilt yields, quantitative easing and rising lifespans, the wiggle room offered by flexible drawdown can make big difference.
How big? Well, with drawdown limits being recalculated every three years, some pensioners in drawdown have been seeing their annual incomes fall by 40% -- or even more.
Okay for some
So how well is the new system working?
The rule change was announced in December 2010, which effectively gave pension providers just four months to prepare. And, at the time, there were predictions that only the more fleet-of-foot specialist SIPP providers might be able to prepare in time.
And nearly a year on, the flexible drawdown pensions are available -- or at least, are available for some pensioners in drawdown.
Simply put, according to research by Moneyfacts, flexible drawdown is now available on around three quarters of SIPP plans. That's the good news.
The bad news is that the list of flexible drawdown providers includes a good many providers who are relative minnows in the world of SIPPs, and excludes quite a few of the big names with the larger client bases.
In other words, it's three quarters of the providers, and not three quarters of the pensioners.
And for the most part, these recalcitrant providers are the larger life insurance companies.
"Ten months on from the start of the regime, and the larger life companies remain conspicuous by their absence from the list of those that have the flexible drawdown option in place," says Richard Eagling, editor of Investment Life & Pensions at Moneyfacts.
What's more, he adds, with AEGON and Standard Life (LSE: SL) among these firms -- two firms that also happen to be among the 'big five' SIPP providers, accounting for around 75% of the market -- many SIPP holders might have to transfer their pension funds if they want an alternative to capped drawdown.
Which is hardly good news.
Take the money and run
And, frankly, my contacts in the pension industry aren't surprised.
Flexible drawdown won't be attractive to companies who earn money from funds under management, reckons Billy Burrows of the Better Retirement Group.
"It's more of a fee-based SIPP proposition: firms such as Standard Life want to hold onto a client's money, not see it disappear as a flexible drawdown payment," he asserts.
For his part, Tom McPhail, head of pensions research at Hargreaves Lansdown (LSE: HL) points to the very flexibility offered by flexible drawdown as a deterrent.
"I think many life companies were uncomfortable investing resources in developing a product that is, after all, designed specifically to allow an investor to take all their money out whenever they choose," he notes.
What's more, he adds, it is for this very reason that Hargreaves Lansdown -- and others -- charge for flexible drawdown arrangements, where they wouldn't normally for a capped drawdown SIPP, or would charge less. (Apart, that is, from the cost incurred performing the periodic drawdown limit calculation.)
Certainly, it's fair to say, those firms offering flexible drawdown do levy a fair-sized charge for the privilege -- although one that may be small change to clients in the happy position of being able to take the option.
According to Moneyfacts, for instance, over the past 12 months the average set‑up fee attached to SIPPs has increased to £236, up by 1.7% from the 2011 survey. At the same time, annual fees have seen a greater rise of 3.2%, climbing to an average of £410, compared with £397 a year ago.
That said, a good number of mainstream providers charge a lot less than this. So if you do have to transfer, there are some reasonable deals on offer. For a full list of flexible drawdown providers and their charges, click here.
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