Considering Drawdown – Understanding the Benefits AND the Risks

What is income drawdown?

Income drawdown allows you to receive a pension income while allowing your pension pot to continue growing. This is a method that will enable you to keep your money invested instead of using your entire pot to buy an annuity. However, you can still receive a regular income from your funds should you wish to do so.

But income drawdown has a level of risk involved. It doesn’t give you a guaranteed lifetime income. If your investments perform well, you could see your pension fund growing, giving you a higher level of retirement income. At the same time, if your investments are poor performers, you could end up losing money in the long term.

The income drawdown era

Information taken from the Retirement Sentiment Index: Surviving Market Volatility, April 2018.

With around 100,000 new income drawdown policies entered between April and September 2017, it seems that more and more people are using drawdown when accessing their pensions for the first time. This is a significant increase of 17% compared to 2016, meaning that drawdown overtook annuities policies by a factor of 2.5.

In fact, 350,000 new drawdown policies were sold between October 2015 and September 2017, counting for 30% of the total number of brand new pension pots accessed) – so there doesn’t seem to be any reason for the growth of popularity in drawdown policies to slow down anytime soon.

Times are changing

But, in contrast, research has revealed that the factors which will determine what the over 50s consider an acceptable way to use their pension in retirement have changed quite significantly.

Up from 26% last year, 39% of over 50s claim they are entirely unwilling to take any financial risk with their pension funds. Those who would take some risk but seek safe investments is down from 40% to 39%, while those who are willing to take risk if there was a good chance of a favourable return is down from 28% to 17%.

Both of the latter figures are at the lowest they’ve ever been, showing a change in retirees priorities when it comes to income. Most require instant access to their funds and fewer people want flexibility – which will influence the type of retirement product they’ll desire.

Shockingly, 32% of retirees who chose a drawdown option since 2015 did so without seeking any form of professional advice. Treading into such unknown waters is risky territory – we’d always advise talking to a financial planner before signing up for a drawdown policy. Get in touch with Cowens Financial Architects – our experienced and chartered team can help you decide what option is the best for your individual circumstances.