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6th May 2014
The budget announcements with their increased emphasis on drawdown only preceded the introduction of the FCA’s new illustration regime by a few days. Whilst the FCA requires that all pre-retirement accumulation illustrations should, in future, be presented on an inflation adjusted basis, they did not mandate such a change for drawdown illustrations. Consequently, CTC has provided its clients with a choice as to whether to leave drawdown illustrations on the old “nominal” basis or convert them into inflation adjusted figures.
For some time CTC’s house view has been that inflation adjusted illustrations will be highly confusing to customers and make it even more difficult for advisers to show the benefits of saving for retirement within a pension product. This is particularly the case with drawdown where a year by year forecast of income to be taken has to be shown. Under an inflation adjusted regime if a customer was looking for £5,000 per annum of income (e.g. to compare with a level annuity) an inflation adjusted drawdown illustration would actually show income levels of £5,000 in year 1, £4,878 in year 2, £4,759 in year 3, etc. The problem is compounded when the fund that remains invested will now show very low inflation adjusted growth rates and almost always on the lowest projection a negative amount.
Following the post budget publicity emphasising the opportunity for customers to withdraw their whole pension pot immediately it is important for the pensions industry to be able to show the benefits of leaving the money in the pensions wrapper until it is needed. ISAs may well be an equivalent alternative investment wrapper, but in growth terms they are no better than money remaining in pensions. Any ISA projections will be in nominal terms. Taking substantial sums from the pensions wrapper and transferring it to an ISA may seem attractive but can have considerable short-term tax implications. By the same token, moving money from a pension product and leaving it in a net building society account is almost certainly the worst possible route.
It is within this context that the way in which drawdown illustrations are developed over the coming months must be seen. At CTC we are working hard on developing new approaches for online planning tools and illustrations in this area, but we are convinced that it is easier to make such presentations on a nominal rather than inflation adjusted basis.