Just how flexible could flexible drawdown get? Once the Minimum Income Requirement (MIR) has been met, flexible drawdown comes with no limits on the amount that can be withdrawn or the frequency of withdrawals. What might pension – and in particular SIPP – providers offer?
There would be a new up-front cost with flexible drawdown of satisfying the MIR and the SIPP administrator acquiring evidence. That is not likely to be expensive, it’s one-off and there are some significant on-going cost-savings to set against it.
With no need to value the pension fund in order to set income limits, there’s an immediate potential cost saving. There is also no need to monitor the level of income taken, no possibility of paying out more than the maximum allowed and having to recover it. And there’s no need to revalue the fund every 3 years and re-set the income limits (and, if necessary, the level of income taken). That’s more cost-saving in running these funds.
Drawdown payment systems typically run monthly batches. The frequency could be increased: fortnightly, weekly, maybe daily. In fact, the ultimate flexibility might look more like making individual payments from your online current account – there is, after all, a current account at the heart of a SIPP. Introducing such systems would inevitably be expensive, though. Would large providers have sufficient economies of scale and is there a demand?
As flexibility and adaptability increase, so does the difficulty of advising such clients. They at once increase the need for planning and reviews and defy it. How disciplined will the client be in sticking to the plan? Ill-discipline and drawdown this flexible would be a potentially dangerous mix.
And what of managing the investments? One of the rationales for drawdown is usually to remain invested, aiming for some capital growth. But you can’t take cash out of the bank account unless there is cash in there. How is an investment manager to cope with such extreme flexibility? If the level and frequency of withdrawal is unknown, investments can’t be managed for this. Some kind of plan needs to be in place, in advance. That sounds more like what we’d anticipate with capped drawdown except that flexible drawdown would allow deviation from the plan. The more the client were to ad lib, the greater the risk of irreparable damage.
So what do you think? Will we one day be asked whether we are paying by debit card, credit card or flexible drawdown?
Interesting as it is to ponder these challenges, I don’t think this is flexible drawdown’s killer app. I’ll save that for next time!