Drawdown pensions – why they appeal
Recently the Financial Conduct Authority (FCA) has expressed concern at the growing number of retirees that are drawing down on their pension funds rather than buying annuities with them.
Drawdowns – (capped or flexible) are where a pension pot is left invested but an amount is taken as income.
Annuities – where the pension pot is used to buy a regular income from an insurance company.
Changes to the way in which pensions can be spent and invested were triggered by the launch of pension freedoms in 2015. Though designed to give retirees and over 55’s more choice, many are choosing drawdowns without seeking professional advice from a finance expert – 5% prior to 2015 but now that figure is at 30%. Without professional advice seniors may pay too much tax, miss out on benefits, or on other investment growth.
Most seniors that drawdown entire pension pots have:
- Relatively small savings at £30,000 (or lower) and;
- Have other sources of income.
Drawdown monies are most often used to:
- Clear loans, for example mortgages (whole or in-part);
- Make purchases such as home repairs, cars or holidays;
- Invest in property, stocks and shares, bonds or other investments;
- Save into another fund.
The FCA found that an undercurrent of ‘pensions investment distrust’ lead many retirees to drawdown and move money out of their pension pot. Over 70% of seniors accessing retirement funds are aged under 65 years’ of age.
The FCA have said:
“Drawdown is complex and [retirees] may need more support and protection.”
As the shape of our economy and ageing population changes it is hardly surprising that retirees wish to invest differently. We would advise however that anyone looking to change their pension investments should speak to an independent financial advisor, but also one that specialises in pensions.
We cannot advise generically on the best investment for you we would ask that you please book a pensions/investments consultation either with Hamish Gairns or, with Richard Smith.
But we do have some lifestyle and health tips especially for over 55’s.
- Identifying and fulfilling a sense of purpose has been found to lead to a longer life. Patrick Hill and Nicholas Turiano conducted the longer life research at Oxford University. The good news is that finding a sense of purpose can happen later in life to the same effect.
- Creating a retirement plan that gives prominence to what people want to do, and how they want to live in later life helps to shape conversations around finance and inheritance planning. We would suggest that finances that compliment a retirement plan are discussed with a retirement specialist IFA.
- As the UK population is an ageing one, putting health at the centre of a retirement plan is a good idea. It might be that joining classes and groups takes the grind out of physical and mental exercise. And activities that are completed in groups enable participants to extend their social circles. Learning a language, or to dance is proven to keep minds and bodies active.
Here’s to enjoying many later years.
Contact MarchwoodIFA for pension, investment, mortgage, equity release, and living inheritance planning advice: 01243 532 635.