Warning of “capacity crunch” if number of pensioners in drawdown sees five-fold increase

5th November 2014

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Standard Life has warned that providers may buckle under an anticipated five-fold increase in  retirees opting for pension drawdown.

Next April when new pension freedoms come into force, it will be much easier for retirees to opt to draw down an income from their pension savings rather than buying an annuity.

While many will welcome this new flexibility, Standard Life has warned that there could be a “capacity crunch” in the market as it estimates the proportion of people choosing income drawdown will soar from 6% today to 30% in 2015.

It predicts there will be a cumulative impact as each year providers will have to cope with thousands of extra people going into drawdown via their investment platforms, on top of the number who are already in the system.

It said that a provider that  currently deals with 2,000 drawdown customers could see this rise to 10,000 next year, 20,000 by 2016 and 30,000 by 2017.

It said that drawdown has remained a niche product for most platforms despite becoming more of a mainstream option 10 years ago.

David Tiller, head of adviser platform propositions at Standard Life, said: “Platforms’ operational capability will be sorely tested by the rapid growth in drawdown business.

“Many platforms have yet to make the transition to fully clean and unbundled share classes and are having to devote considerable resources to the ongoing conversion in the run-up to the sunset clause in April 2016. Having to also build additional scalability to cope with drawdown demand will put even more pressure on their systems.”

Tiller said the process for setting up and managing drawdown is much more involved than setting up an annuity.  Assets need to be invested and often complex withdrawal arrangements made.

He added that advisers will need to carefully assess which platforms will be ready to deliver drawdown to their customers.

He said: “A platform’s ability to pay accurate retirement income on time should be rigorously assessed through due diligence processes. For clients accessing the new pension flexibility the process should operate as smoothly as receiving a monthly salary.

“There are also tax implications for clients with providers which don’t have the capability to calculate and pay out net income after tax. Advisers will want to be confident that they are not left to manage their clients’ tax return unnecessarily.”

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