FSA fears drawdown mis-selling but annuities not the answer

At last - they havbe identifed the problem. Who says annuities are not the answer anyway. I still see rates north of 6% - that's not terrible. (It's not wonderful) but as a core income - one would hope that cliens have additional sources - it's no disaster.

The notion of retirement of literally doing nothing remunerative between the ages of 60/65 to 75/80 is now an outmoded idea. 80 is the new 60!

Is the problem really not more one of lack of financial knowledge on the part of the populace who in any event have about as much confidence in the pension system as they have in a Toyota with a dodgy pedal!

This coupled with provider's happily taking instructions from client's directly regarding annuity purchase when they know that excercising the OMO would in many cases lead to higher income levels.

Still with most pension funds being below £50K and the average punter unable, unused, or unwillng to pay fees and the average IFA not being a charity this is a problem for the FSA to resolve because it knows best!

The temporary annuity route such as those offered by Living Time and Just Retirement is a good halfway house which ironically is arranged under USP rules!!

The FSA are probably right with their fears but hindsight is easy.

Not too much longer now before advisers will fear recommending any product to their clients for fear of what may happen in the future.

The FSA should realise they are also a major part of the problem and their actions over the last decade or so have made matters much much worse than if they did not exist.

What has regulation improved apart from the massive undustry it now is?

I recall using income drawdown in the mid nineties when it emerged and we used it effectively as a vehicle to improve the lot of individuals who didnt want a life office to make a windfall through premature death what they had saved for for perhaps fourty years. We also tried to manage risk by placing funds according to the clients risk appetite and atiitude to risk.

The FSA came up with a statement saying all people in drawdown must hold a degree of funds in equities. I remember the statement clearly in amazement. Their argument being for drawdown to overcome its cost hurdles it must expose funds to market driven assets. the markets bombed and stayed flat for several years post Florida election. Some of my clients bitterly remember seeing the drawdown pot diminish because of equity exposure and the FSA said nothing and did nothing. It was culpable and highly irresponsible but as they are above the law in the UK they have no legal accountability and until this last element changes the same misplaced judgement calls and passing of obligation and accountability will continue.

The same with 3rd way annuities. The returns are so modest and yet potentialy lock clients in thus loosing flexibility that a factory gate SIPP Drawdown with a 5 year Scottish Widows Bank (40% UK Govt owned) paying 5.15 % is better than all of the other so called safe options as the funds and investment options can be revisted in five years as can annuities.

I could go on further e.g. Drawdown only suitable for pots of £100k statements. Save a small pot and get above triviality and you lose pension credits compared to the guy next door who didn't bother and spent his money who gets the full pension credit now.

Bring on the Revolution

here we go again and no its not whitesnake but the FSA.............

posters are on the right course here, the PIA published excellent guidance and then the HMRC change the drawdown rules to USP and hey presto no need to run down your fund by drawing an income you do not need!

problem - is this the start of misselling or if people access their lump sum via USP are they wrong? clients have in many cases accessed lump sums due to the macro economic meltdown - threat of repossession, supporting a businesses finances, overdraft being removed by a stricken and greedy bank, fear and realisation of unemployment as well as the other factors such as helping children on the property ladder.

there will be those for whom it may not be fit for purpose such as those reliant on the income and ripping out the maximum income. that is a story in itself as there may be other factors at play.

you have to wonder if they just dream up thematic reviews at cannery row for fun.

oh yes and I am sure that there may be misselling of drawdowns, it will depend on the terms of reference of any review and not all advisers will be blameless either

It takes almost 24 years to break even when purchasing an escalating annuity in comparison with a level annuity.

And with the exception of any guarantees that were purchased, the whole pot of purchase cash is lost.

Does this really sound like good value?

However, if someone wants to take the "drawdown" route they simply MUST accept that there is an element of investment risk. Furthermore, in order to attempt to offset lifelong inflation, the effect of any drawdowns actually taken and the reduction in yield due to the charges, they MUST take a more aggressive investment style.

Not perfect for all.

For many, pensions have deteriorated into a rip-off!

Here here Mr William Ward very well put. Perhaps you should apply for a position at the FSA.........

As previously referred to above, it would be very interesting to see some analysis of how many people who end up with an annuity (especially not using OMO) end up with the most suitable solution to their retirement needs. I understand that around 2 out of 3 people do not use OMO with their pension fund, so that gives us an idea of the scale of the issue.

Given the irreversible nature of the traditional annuity contract, this aspect seems to be in direct contrast to the FSA TCF concept of not placing obstacles or barriers in the way of consumers after they purchase a product - and given the margins made by annuity providers on this book of business, it's hard to see how in general terms, annuities are TCF friendly in any way.

The newer products offered by Living Time and LV are very interesting for certain clients (who seem to like the guaranteed final value aspect), either alone or even as part of a cocktail of solutions designed to spread the fund around and provide a bit of hedging - they also defer the final decision and bearing in mind the likely deterioration in health and possible death (spouse or client) the final annuity bought can provide a much higher level of income than would have been secured previously by straight annuity purchase - and the possibility of a fall in rates is at least partially offset by these factors.

One reason that alternatives are not recommended as often as they perhaps should be is the FSA view of anything which isn't an annuity (i.e. deep suspicion, especially if it actually pays the adviser a decent amount to get involved in giving some advice), which is naturally reflected in the Compliance approach within firms to these cases. Funny how even now with annuity rates at a pretty low level historically, and this combined with fund values still recovering from recent falls, the FSA still feel annuity purchase is absolutely the default option - I wonder under what set of circumstances this would change, if not now?

To sum up, if an alien came to earth and asked (as he or she surely would), "how do people vest their retirement funds in 2010, mr earthling?", and we presented the options to the alien and asked him to apportion a % for each, I think he'd be a tad surprised that annuities came out so far ahead of all other solutions. I mean, if they're such good value and so great, why don't we make a purchased life annuity the default option for income producing investments, given that the tax treatment is better than a pension annuity?