Drawdown has become increasingly popular as the post-pension freedoms market has matured.
Subsequently, advisers and the pensions industry have been forced to try and keep pace with the proliferation of demand.
As an added complication, we are also seeing different types of people, with varying pension pots, opting to take this route through retirement, shunning the previously ubiquitous annuity.
This risks putting a certain strain on the advice profession and the wider pensions industry as both play catch up to match this demand.
The spotlight is firmly on pension advice in the wake of the British Steel debacle. Given this backdrop, the last thing we need is providers and, to some extent, advisers not fully understanding and effectively managing the risks drawdown presents and ultimately choosing the wrong pathway for their clients.
I believe we need some pre-emptive action from the industry bodies, just like the kind we have seen when it comes to defined benefit transfers.
This is something I have asked of the Association of British Insurers when they had the misfortune of asking me to speak at an event.
I have repeatedly said to them: “What’s the equivalent of your five a day for drawdown advice? What are the things that we universally agree on – the five things that have to be in place when you’re going into drawdown?”
However, providers are nervous of providing this for fear of straying into guidance or advice. But I can’t quite understand why we, as a pensions industry, can’t come up with very simple rules to help make advisers’ lives easier, and allow them to better inform their clients.
All we need is a broad guide to help a client or an adviser to get started, that is, if you’re going to go into drawdown here are the five things you absolutely have to think about.
My own equivalent of a ‘five a day’ drawdown framework would look something like this:
1) Keep costs low In March, MPs on the Work and Pensions Committee called for a 0.75 per cent charge cap on default drawdown products, as is the case for auto-enrolment schemes.
The FCA also has costs front of mind. In its Retirement Outcomes Review final report, published in June, the regulator said it plans to monitor charges associated with default investment pathways. If it finds evidence of "excessive charging", the FCA is likely to move to a charge cap.
2) Provide easy to understand information Drawdown is inherently complex, and clients need help with navigating factors like sequencing risk and the level of income they can safely take. This is where financial planners, with the support of pension providers, can come in.
3) Have a default investment strategy Default investment strategies, or 'investment pathways' as the FCA calls them, is where the regulator would like the market to move to: ready-made drawdown investment solutions suitable for mass market customers with straightforward needs.
4) Have a reasonable withdrawal rate Of course, what constitutes a 'reasonable' withdrawal rate is a much longer discussion for another day (and one that I have argued about alongside esteemed colleagues on many an occasion). As I always say, the one thing I know for sure about the so called 4 per cent rule is that only 4 per cent of people understand it. But having a well justified withdrawal rate in place is a big piece of the puzzle in delivering good retirement outcomes for clients.
5) Challenge the asset allocation status quo This is another subject close to my heart. Drawdown and the flexibility offered post-pension freedoms means rethinking the traditional way of doing things, and moving away from the idea that you have to take less risk in the run-up to a set retirement date. (You can read more on my thoughts on rethinking retirement investing here)
Overall, I think we have to recognise this is about more than just the theory: there are real people at stake in this conversation.
The overarching question planners and pension providers have to keep coming back to is this: How do we help those considering or going into drawdown in a way that is robust, and in way that delivers the right outcomes for people in retirement?