Income drawdown: are pensioners taking a risk they can’t afford to lose?

15th September 2014

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With a sharp increase in retirees opting for income drawdown plans, one insurer has warned many could be gambling with their pensions.

Figures from the Association of British Insurers (ABI) bought 9,500 income drawdown contracts in the second quarter of the year as individuals rushed to get their hands on their pension savings.

The Budget in March paved the way for an increase in drawdown as chancellor George Osborne announced no-one would have to buy an annuity again.

Annuities are the traditional way in which to turn a pension pot into income, by giving an insurer the savings in return for an income for life. Drawdown means the pension pot remains invested and an income can be taken each year. However, a relaxation of the pension rules mean everyone can now access all their pension cash in one go through drawdown, minus income tax.

It is unsurprising then that the sale of 9,498 new contracts with a total value of £669 million that were sold in the second quarter of the year is a substantial leap from the 5,476 contracts worth £425 million that were sold in the same period last year.

Correspondingly, sales of traditional annuities fell by more than a third between the first and second quarter of the year.

Insurer Just Retirement has raised concern about whether retirees have forgotten the impact of the financial crisis and are betting their pension on the stockmarket when they can’t afford to lose.

With the anniversary of the Lehman Brothers collapse six years ago this week, Just Retirement customer insight director Stephen Lowe said retirees should heed the anniversary and think carefully about risking their pension pot.

‘It seems that people who once would have been discourage from taking investment risk with pension money are now opting for plans that are likely to be more risky and complex. It looks like a triumph of hope over experience,’ he said.

‘There’s no problem with people taking more investment risk if they can afford to ride out the ups and downs. The problem comes when people are relying on those investments performing in order to pay for day-to-day living costs, because history tells us that asset prices fall as well as rise.’

 

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