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FSA Concerns As Pension Drawdown Incomes Plummet

April 20, 2012 | Comments: 0 | Views: 265

In its 2012 Retail Conduct Risk Outlook the FSA have pointed to the inherent risks within the expanding de-accumulation market and have specifically focused on pension drawdown products. Their concern lies with the fact that advisers run the risk of not fully explaining or understanding the very plans they are selling.

1. Is an annuity more appropriate for most consumers?

The FSA was concerned by the danger that many consumers would be sold income drawdown when in many instances either a standard pension annuity would be more appropriate or to a lesser extent, the advice provided fails to fully consider all the options available, and as a result the retiree sees an unnecessary erosion of their pension savings.

2. Four major risks associated with pension drawdown products:

• A risk that the capital value of the fund will be eroded because investment returns are less than the assumptions used in the illustrations and subsequently deteriorate.

• Future annuity rates may be worse than those currently available.

• The sustainability of high income levels if the maximum annual withdrawal is selected

• Income sustainability when a short term annuity is chosen.

The FSA argue that providing advice on drawdown contracts requires consideration of very different factors or variables compared with annuities with which they are more familiar. This can lead to greater consumer losses, risks and increased costs.

3. Fixed term annuities are a form of drawdown product.

Prudential spokesman Vince Smith-Hughes, explains: "The fact that the FSA highlights the risks which income drawdown and thus fixed-term annuities present to consumers is timely, as more of these products are appearing on the market.

Fixed-term annuities are, rather misleadingly, drawdown products. So from the outset it is imperative that advisers ensure that the appropriate risk warnings are given when recommending them.

Income drawdown quite rightly remains a popular solution for those who are keen to benefit from a level of flexibility which most other retirement products cannot offer.

However, it is right for the FSA to highlight income withdrawal risk factors which need to be carefully considered before entering into one of these arrangements, whether it is drawdown in the traditional sense or fixed-term annuities."

4. FSA concerned by removal of the need to annuitise at age 75

The FSA felt the removal of the need to annuitise at 75, combined with low gilt yields and the Solvency II proposals for insurers which increased the capital adequacy requirements will impact income levels retirees can expect.

In a repeat of their recent warning, the FSA voiced concern regarding employer sponsored advice and the cash incentives currently available to those members who were prepared to transfer out of defined benefit schemes. The regulator has established strong evidence of poor advice in this area. As a result 1,000's of UK drawdown customers have been put on alert to expect their regular income to drop significantly when their next annual review takes place.

The author works on behalf of client companies in the retirement sector, helping them to promote their businesses through articles such as pension annuity quotes and how to find the best annuity deals best annuity rates

Source: EzineArticles
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