New Report Highlights ‘Risky Behaviour’
Pension drawdown has become considerably popular. Introduced in April 2015 pension drawdown (also known as pension freedom), allows investors over 55 to withdraw up to 25% of their pension pot tax-free. More of the pot can be withdrawn at the discretion of the pension pot holder. It has been hailed as giving holders more control over their pension fund.
It is how people are using it which is raising eyebrows, and highlighted in a new Financial Conduct Authority (FCA) report. According to the FCA, around 37% of over 55s are buying drawdown policies off the shelf and not using professional help to choose the best products.
If you are considering withdrawing a lump sum, it would be prudent to seek advice from a financial planner. Here’s why:
- If you opt for the plan offered by your existing provider without shopping around, you are missing out on having the best retirement possible. This is a little like buying insurance. It always pays to shop around.
- If you just withdraw the 25% without a future plan for investment, again you are hampering your retirement over time. The FCA found that many over 55s were doing this.
- If your pension pot has been ‘lifestyled’ by your provider, it could well be underperforming. ‘Lifestyled’ funds are invested in low risk assets, geared towards annuities. If you want to utilise drawdown you need a pension fund that is structured for it. This will give you a better return on investment if handled correctly.
- It is not a good idea to drawdown lump sums and put them in cash funds despite arguably simpler access. Many of the funds come with charges that offset potential growth.
The FCA report states:
‘Deciding whether to draw retirement income using drawdown is a complex decision for customers,
‘Customers taking decisions without advice rely on the information from firms. This can result in a poor financial outcome for customers.
‘They could be exposed to investments that are too risky for them, or which do not create enough investment return. They could also run out of money in retirement if they are poorly informed about the risks of drawdown.’
The report found that pension firms were competent at giving pension holders adequate advice although it did highlight areas where they felt improvements could be made and has asked firms to address the issues found.
For example, it felt that firms were failing to pass on important information to pension holders that would help them make better decisions. The information was either absent or sent at the wrong time.
Avoid Pension Drawdown Pitfalls and have a Better Retirement
Pension drawdown gives you better control over your pension pot and gives you a sense of security that money is available when you need it. Your pot has to be used wisely and so planning is essential. My award winning financial planning advice can help you.
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Source: This is money