Income drawdown – the need for financial advice

Leon Hunt

Private Client Adviser

Recent research by the Financial Conduct Authority (FCA) has reviewed the decisions which some people are taking on drawdown without advice. This has highlighted some concerns which our advice services can help to address.

Back in June 2018, the FCA issued a consultation paper following a two-year review of the impact of the pension flexibility reforms introduced in 2015. The FCA was concerned about pension owners who having received various prompts to seek advice, decided to access their pensions through drawdown without taking advice.

• The FCA found many of these individuals were solely focused on taking their tax-free cash and paid little or no attention to the investment of the remaining funds to be used for drawdown.
• Around one in three were unaware of where their drawdown money was invested.
• Some pension providers were ‘defaulting’ non-advised clients into cash or quasi-cash investments at drawdown. As a result, one third of the non-advised users of pension drawdown held their entire drawdown fund in cash.

The FCA concluded that “a significant number of non-advised consumers are likely to hold their funds in investments that will not meet their objectives for how they want to use that money in retirement”.

The proposed solution was to mandate the provision of a range of ‘investment pathways’ for drawdown funds, based on the client’s objectives for their pension pot. The regulator also proposed specific warnings issued to those who held more than 50% of their drawdown fund in cash or cash-like investments.

The proposals were due to be introduced in August 2020, but the implementation date was put back to February 2021.

How does this affect drawdown investors?
With cash returns virtually zero, the delay has potentially been costly for some non-advised pension owners who may have missed out on potential growth opportunities in the last six months, when many global stockmarkets have recovered some of their falls at the start of the pandemic.

If you are unclear where your drawdown funds are invested, take note of the FCA’s findings. The investment pathways will help, but they are not an advised solution, tailored to your circumstances.

The benefits of our drawdown advice service
At Origen, at our annual reviews we will assess our client’s risk tolerance to ensure that funds are always invested appropriately and make any investment adjustments required. Due to current events and additional market volatility, the value of reviews has been even more important. Our clients appreciate these reviews which ensure that their plans for retirement remain on track and help to manage income in retirement tax efficiently.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

CA6248 Exp 08/2021

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