There has been a surge in DIY investing into income drawdown since the pension reforms came into effect. Data from the Financial Conduct Authorities states that almost half of the retirees going into drawdown, have done so without the use of a financial adviser.
The rise of the Do It Yourself investor, has gathered pace with many experienced as well as first-time investors attempting to manage their pensions.
Some of the major pension providers have been quick to take advantage of this trend by offering their own brand of a ‘non-advised’ or DIY service.
The data, taken from the period of July to September 2015 shows that 178,990 accessed their pensions. Of this number, 68% were fully cashed out, of which 88% were small pots (less than £30,000).
Those who were looking to withdraw all their cash were the most likely to visit Pension Wise. This is probably due to a desire; to understand the tax implications a lump sum withdrawal can have.
The 178,990 figure includes those who cashed out, or chose to go into income drawdown.
One of the startling points from the data is that 58% of people stayed with their existing provider. There can be a massive difference between ongoing cost from provider to provider and it therefore seems that many people are not getting good value.
People used to shop around when purchasing an annuity, however for some reason they are not doing so with drawdown.
The DIY investor should understand that there are over 100 providers offering drawdown and thousands of funds available. Being stuck in the wrong plan could cost thousands of pounds in lost growth or excessive fees.
Never just accept your existing pension provider’s drawdown proposition.
The FCA is concerned that too many people are choosing to enter drawdown without fully understanding the risks. They have launched a review into the conduct of some providers non-advised service.
The Data also shows that people are still wanting a guaranteed lifetime income through purchasing an annuity. Annuities have attracted some bad press over recent years but they are still a great product for those who prefer the certainty of a guaranteed income. In total, 30% of the 178,990 people in the data sample, decided to lock into a fixed lifetime income.
Recent data from Retirement Advantage stated that more than 43,000 drawdown plans were sold in the first six months since April 2015. With recent market volatility, there is concern that those who were inexperienced with such investment products, didn’t understand the potential downsides to investing.
All funds have an expected risk level, sometimes labelled from 1 to 10, with 10 being high risk. Those funds that have done extremely well for years, will often be the ones carrying a lot of risk and equity exposure. When markets turn, these are heavily hit.
In April the FTSE 100 stood at 6,961, today it stands at 5,810. That’s a decline of around 17%. A £100,000 fund would therefore be worth £83,000 if just invested in this indices.
It’s important to have a well-diversified portfolio, both for when times are good but equally when markets are declining.
Taking income out of a drawdown plan whilst markets are declining also compounds the problem. Often referred to as pound cost ravaging (the opposite of pound cost averaging, where investing regularly is said to be the most efficient way of investing), it means units are being sold at a much lower price, therefore meaning the fund has to work even harder to make up the growth.
The sensible option when markets are declining is to try and find another source of income to cover expenditure needs. This isn’t always feasible however and it’s something many DIY investors are not factoring in.
Steve Lowe, external affairs director of Just Retirement says the regulator needs to consider introducing protections for savers entering non-advised drawdown.
“Drawdown is becoming almost the default in the non-advised space, and these customers are getting no reviews”
We shall await the conclusions of the FCA consultation paper, which may hopefully provide a more robust process to ensure the risks of drawdown are fully understood by everyone before taking this route.