John Moret is one of the UK's leading pensions and SIPP experts and commentators. As he enters his 75th year, still working part-time in the sector, he continues his series of articles for Financial Planning Today looking back at the changes that have shaped the pensions sector during his career. In this third article in the series he looks at the rise of income drawdown and what changes may lie ahead.

Aside from SIPPs, income drawdown is the area of the pensions market that has occupied one of the largest parts of my career over the last 30 years.

I was in at the birth of income drawdown in 1995 and indeed played a part in influencing the government at the time to relax the rules on annuity compulsion.

The company I was working with, Provident Life, attempted to launch a flexible annuity but could not persuade the Inland Revenue that it was an annuity. The Revenue argued it did not meet the previously unpublished requirements of an annuity – that it “should be safe, stable, regular and for life.”

However, interest in having an alternative to an annuity was huge with enormous media coverage and debates in the House of Commons. Indeed I was invited to meet one of the Prime Minister’s advisers at Number 10 to discuss the potential for an alternative.

I remember being told that they were thinking of setting a maximum drawdown limit broadly equivalent to a current annuity and what did I think would be a good minimum income limit. Off the top of my head I said about a “third of the maximum amount” and lo and behold when the first regime was introduced in 1995 the minimum limit was 35%.

Those early days of drawdown were fascinating, with a few pioneering providers and a lot of discussion and debate particularly around the subject of “mortality drag.” There were, and are, mixed views about the risks associated with drawdown – both investment and mortality risk. However I remember asking one early user of drawdown on camera for his views and he replied, “income drawdown is the best thing since sliced bread!”

There have been several iterations of drawdown over the last 28 years including the 2006 and 2011 reforms and, of course, the introduction of the Pension Freedoms in 2015. As is usual, each change brought with it another layer of legislative complexity, with the 2015 changes introducing flexi-access and capped drawdown.

There has been a lot of academic work, particularly into investment risks - such as sequencing risks – and “safe” withdrawal rates. There has been less focus on longevity risk, particularly the distinction between healthy and unhealthy longevity which can have a marked impact on income needs, particularly towards the end of life when care concerns and costs are likely to increase.   

The FCA recently announced an overdue thematic review of retirement advice and a report is due before the end of the year.

It is no coincidence that this review takes place as the new Consumer Duty requirements are implemented.

Of course there are many users of the Pension Freedoms, and the earlier variations, who have never taken advice and others where initial advice was provided but subsequently the investor has operated on an “execution only” basis.

The regulatory risks for providers are significant, which may partially explain the apparent lack of innovation among providers and advisers in providing support to clients in what is such a crucial area.

There seems to me to be a real knowledge gap in terms of customer experience. I remember back in 2007 when I was at Suffolk Life we analysed the experience of the first 1,000 clients to take out Suffolk Life SIPPs.

It was a fascinating piece of research which demonstrated the persistency of SIPPs and showed that over 25% of those clients had actually fully or partly vested their SIPP within 10 years. As we said at the time, all these clients had used SIPP flexibility to its full potential. It would be great if some current providers could undertake similar research and publish the results.

I firmly believe that technology and AI have a big role to play in the next generation of income drawdown solutions.

Most SIPP and platform providers seem to have been in a time warp on drawdown technology - with many of the newer fintech providers viewing drawdown as too complicated and preferring to concentrate on the accumulation market. For me they are missing a trick but there are signs that one or two of the more innovative platforms, such as Seccl, are looking to change that. For some larger providers and platforms there is also a real risk of a haemorrhaging of assets as change takes place.

Of course it would help if the legislative and regulatory framework were simplified. Personally I’ve always been uncomfortable with the “Lamborghini” concept. I would have much preferred that Pension Freedoms were only available to those able to provide evidence of a sufficient level of other income – either a monetary amount or a multiple of the state pension.

With the full abolition of the Lifetime Allowance from April 2024 and the consequential changes introduced post this year's Budget the impact of tax charges has arguably become even more complicated, particularly on death benefits. Sadly politicians in grabbing the media headlines pay scant regard to the consequences for individual investors, preferring to leave civil servants and others to sort out the detail.

Technology ultimately ought to be able to provide solutions in the absence of any genuine simplification but just how long will that take? - and of course there is always the risk of further political interference. Life was certainly simpler when annuity purchase was compulsory!

John Moret is principal of MoretoSIPPs consultancy and one of the UK's most experienced SIPPs experts, commentators and speakers. He has worked for Suffolk Life and several other SIPPs providers. He is chair of advisory business Intelligent Pensions and CX insight business Investor in Customers.

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www.moretosipps.co.uk