Non advised drawdown – how many start it each year and what do they need to make it work?

The latest Financial Conduct Authority (FCA) stats for the year between 1 April 2021 and 31 March 2022 tell us some interesting numbers.

Around 700,000 new defined contribution (DC) pension pots, i.e. the ones you can take however you want, were accessed by retirees. These pots had total assets of around £46bn. This means the average sized pot accessed for the first time was around £65,000. Of course, many people have more than one pot and nearly everyone will have other things they can put towards a retirement income.

Nearly all will at least have some State Pension and many current new retirees will also have old defined benefit (DB) scheme incomes. The number of people with these DB incomes will fall over time and the average sized DC pot will likely rise, given the switch between them in the last couple of decades.

1. So what do people do with their pots when they first access them?

Around 400,000 pots are taken in one lump sum. This is mainly smaller pots but there are some larger ones in there as well. It’s hard to see the sense in doing this, unless the money is needed now for a large purchase, or to pay off debt with high interest rates. Taking it all as a lump sum to put in a bank account seems never to be in anyone’s best interest, but that is a topic for another day!

Around 70,000 of these pots bought a guaranteed income for life (annuity). A great choice if you want an income payable for life with no risk at all and don’t need flexibility. Our article on the benefits of purchasing a bit of guaranteed income is here

That leaves 230,000 pots which were not taken as one lump sum, or used to buy a guaranteed income. By definition this means they went into drawdown, i.e. taking income flexibly each year. Either they were used to set up a long term drawdown arrangement, or are being used to take payments as and when needed.

2. Drawdown is hard to get right – did these retirees take advice?

Looking at the numbers, around 120,000 pots were used for drawdown after taking advice and around 110,000 pots without advice, so broadly half and half.

Taking advice from a regulated expert is always the best option if you can access this and afford it. You can find help in finding vetted advisers, experienced in providing exactly this type of advice, in our new Dashboard area, should you want it.

3. What will these unadvised people do?

Let’s look at the retirees with the 110,000 pots entering drawdown that did not take advice. These pots had around £6bn of assets in them, which is a lot of money.

Firstly, they need to decide if they will keep their pots with their current provider, or providers, or move to a new one. For many there may be no choice as the current provider, or DC scheme, may not allow drawdown.

We asked our users, who match the FCA data very well what they would do? 73% said they would put their pots all in one place.

We then asked who would they move to? 63% said they would search the market for the best provider, rather than just putting all pots into one of their current ones, if they had more than one.

That means around 50% of these £6bn of assets, so £3bn, will be looking for a new home each year. This new home would ideally be a pension provider which is best suited specifically for their drawdown needs.

4. So what does a provider need to offer to be considered the best choice?

We do not have all the answers, so we would love to hear what you think.

Our own thoughts are (aside from having competitive costs and security of funds), what these retirees need are:

• The right tools to help them build a tax efficient withdrawal plan that is expected to last
• These same tools should allow them to test “bad outcomes” and also track their plan over time
• Ideally, the withdrawal payments wanted would be offered as an automated default, so they don’t have to deal with the pain of requesting these month to month
• They would still have the flexibility to change these if needed, or get a one off payment if wanted
• The provider would offer an “off the shelf” default investment fund, specifically made for drawdown. This would aim to give them as much chance as possible of receiving the payments they need, with the least risk
• The provider would also offer the ability to easily add some guaranteed income, so the retiree can get the best of both worlds if wanted

We have seen little development from providers to give retirees all, or even some of the above. There have been some exceptions from a few large DC master trusts, such as Creative, Smart and NEST.

Given this, we decided to develop Guiide.auto. Our first joint solution to provide this is with Penfold. This will already provide retirees with most of the aspects above, but we won’t stop there. We will develop and improve this further over time.

As we did when building Guiide, we will listen to those who register for this, to provide them with the product they want.

You can find out more about this here, or if you are already registered with us, simply login to our Dashboard area to see how this can make your Guiide plan a reality. If you like the sound of this product, please register for Guiide.auto with Penfold via our Dashboard area and help us to make this what you want.

Not registered with us yet? Build a plan here today in 5 minutes. Then see our new Dashboard area once you have registered at the end.