The pensions industry has generally welcomed the end of annuitisation since it was thought to give a ‘bad deal’ to pensioners, but in certain cases they were the most suitable option, said Mike Morrison, head of pensions development at AXA Wealth.
A lot of people who opt for pensions drawdown option does not understand the investment risks involved, lamented Mr. Morrison.
“They do not understand that their funds can go up and down and part of that is down to education. Drawdown and flexible drawdown are generally only suitable for people with big pension pots”, he said.
“If you can understand the investment risk and have a good IFA, a few years of drawdown could be a good idea, but people have got to understand that with the flexibility of drawdown comes the investment risk and fund volatility”, he added.
However, some experts don’t agree that the minimum pension pot size should be £50,000 in order to avail the dropdown option.
“Some providers set a minimum threshold to go into drawdown. But what happens if you have a fund of £20,000 but £10m in the bank? Drawdown is not profitable for providers because of the extra work involved over and above a normal pension, unless the fund is sufficient in size”, said Rob Simpson of Coventry based Simpson Financial Services.
“Annuity rates are the lowest they have been for a number of years, and if they are such good value everybody would buy one. Overall, annuity providers make a profit out of the cost and some don’t want the hassle of drawdown for such a small pension pot”, he added.