When new drawdown pension options are made available by SIPP and other pension providers from 6th April 2011, financial planners will be helping some of their clients decide which is most suitable.
a choice between capped and flexible access
The merits of leaving money in the tax-privileged pension fund – not making large, taxed withdrawals from one tax-privileged product only to move funds to another – have been put to me. Set against that, I have seen the calculations from @Cunningham_UK showing the potential opportunities. I will not attempt to enter a debate with people more qualified than me; nor would I fault their logical and structured approach. Instead, I offer an alternative view.
The ideas of rational economics and efficient market theory, based on the assumption that we act as homo economicus, have taken a knock – rightly so in my opinion, looking at the empirical evidence. In reality, when clients hear they effectively have a choice between capped and flexible access to their retirement funds (we are assuming here that this is either in conjunction with annuity purchase or that it has been discounted), they will instantly and instinctively want flexible drawdown, even if they do not expect to take an income greater than that available from capped drawdown.
The next thing to test the client’s emotional response will be the Minimum Income Requirement (MIR). Enter the (non-mathematical) “calculation” I suspect will be going on sub-consciously in the client’s head: “What is the escape velocity needed to break-free of the MIR?”
Whatever this formula, it is likely to be complex and messy, more psychological and emotional than rational and financial. The formula might produce a minimum percentage or monetary amount of the fund than would need to remain after the MIR was satisfied for the client to prefer the flexible drawdown option.
Whether this calculation produces good decisions is a moot point. Certainly it does not mean financial planners should stop using logic! Taking account of clients’ emotional instincts may also be necessary.