Which? proposal for ‘nationalised’ income drawdown provider is a “recipe for disaster”

6th March 2015


Income drawdown providers have attacked consumer group Which? for its ‘kneejerk’ proposals to price cap income drawdown and for an analysis of charges in the market which they say is already out of date.

Hargreaves Lansdown head of pension research Tom McPhail says: “Which? Has done good campaign work on behalf of consumers but on this occasion they are wide of the mark.”

He says that many pension providers will not offer income drawdown and those that are in the process of reviewing charges and terms.

He points out that Hargreaves Lansdown has just scrapped its drawdown fees, so investors pay a platform charge of 0.45% or less.

He adds: “This means the analysis, based on old products is already on the way to being out of date. Some pension providers are also wrestling with rolling out new services and meeting compliance requirements which have only just been published. It is premature to jump to the conclusion the market needs price caps or a nationalised service, when there isn’t any proof that the market can’t meet investors’ needs .”

“The strongest guarantee of a good deal for investors is a competitive market. Investors should make sure they shop around and seek out the retirement income which best meets their personal needs.”

McPhail has also questioned whether disengaged investors should be defaulted into a ‘nationalised’ drawdown provider.

He adds: “Disengaged investors should probably either buy an annuity or take financial advice (or possibly both). Defaulting them into drawdown plans when they don’t understand the risks looks like a recipe for disaster.”

Andrew Pennie, Marketing Director, Intelligent Pensions, says we do not yet know how the public will react.

He says: “The pension freedom changes are a deal-breaker. Their implications are huge and will change the pensions environment forever. At the moment, no-one knows exactly how people will react, and what they will do. We don’t know if they will cash in their pensions or if they will take out drawdown or buy an annuity. We also don’t know fully yet what products providers will bring to market, how popular these will be.

“The drawdown market is unlike automatic enrolment. No-one is obliged to buy a drawdown product, or even bounced into it like being automatically enrolled. Shopping around is key to success of pension freedom changes. People need to be informed about their options and shop around for the best deal – whether annuity, drawdown or UFPLS.

“What is key is whether charges represent value for money for the client, and not get hung up on cost. We need to consider what service and options the customer is getting, and what value they place on it.

“Instead of a kneejerk reaction, we believe a better solution is to help people decide the right retirement strategy for them, not just at retirement, but in the run-up to retirement. And then make sure people shop around for the best solution for them. “

McPhail adds that Which? has assumed a high level of withdrawals of around 5.5% a year on a relatively small amount of money. He says investors with pots of £36,000 may well take out an annuity.

He adds: ““It is also notable that the research is based on the assumption of an investor with a £36,000 fund drawing an income of £2,000 a year. Whilst a minority of investors with such a fund size may go into drawdown, we know that retiring investors tend to be risk averse and place a high value on a secure income. Many transactions of that size will therefore still involve buying an annuity. What’s more, that level of drawdown income (5.55%) has a higher probability of the investor running out of money before they die. This is a much bigger threat to their financial well-being than any marginal differences in product charges.”

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