Providers warn of drawdown risks

The removal of the requirement to annuitise by age 75 could encourage people to remain in drawdown even when it becomes damaging, MGM Advantage and Intelligent Pensions (IP) warned.

The age 75 rule was scrapped last year and replaced with an interim age of 77, before being completely removed in April this year. Investors can now use capped or flexible drawdown indefinitely.

However, annuity provider MGM Advantage and retirement consultancy for IFAs IP warned investors could stay in drawdown too long and miss out on valuable income from mortality cross-subsidisation.

MGM and IP said a 70-year-old man who lives for 20 years in drawdown with a pension fund of £100,000 could miss out on £70,000 he would get if he had annuitised.

This is because within some annuities the funds of annuity policyholders who have died are pooled and then shared amongst those who survive in the form of bonuses.

"There is a huge danger that now people aren't legally obliged to purchase an annuity at age 75, they will drift along in drawdown without fully understanding the progressive nature of its risk," said Aston Goodey, sales and marketing director at MGM (pictured).

"Drawdown becomes less suitable over time, as beyond age 75 the ability to deliver consistent investment returns that will compensate for the absence of mortality cross-subsidy, become increasingly unrealistic.

"This coupled with rising inflation, highlights how unsuitable drawdown is as a long-term solution for some people."

Andrew Pennie, marketing director at IP, added the decade between ages 70 and 80 is the most suitable time for most investors to exit drawdown.