There has been a lot of discussion about the income drawdown market recently.

It has been a key topic in the FCA’s Retirement Outcomes Review, the interim report from which identified many positive outcomes, while also picking up on a couple of concerns that some savers were not taking adequate advice or lacked the support and protection to manage their drawdown fund effectively.

It is also within the scope of the Work and Pensions Committee (W&PC) inquiry into pension freedom. Again, a similar picture emerged from the evidence about the use and, to be fair, occasional misuse of drawdown without limits.

Furthermore, with more people saving money into schemes via automatic enrolment, there is a huge and growing pot of defined contribution (DC) cash in the market. NEST – the National Employment Savings Trust – toyed with the idea of creating a drawdown product. While that did not come to fruition in the end, it acknowledges the fact there is a lot of largely non-advised cash that will at some point need to enter the decumulation phase.

It is therefore understandable why there has been so much commentary about income drawdown and whether this is appropriate in all cases – particularly for non-advised individuals.

What is less understandable is why there has been so little discussion about the role of lifetime annuities. Before pension freedom, 90% of DC pots were used to buy annuities. They offer guaranteed income and a valuable hedge against longevity risk. They also shift the risk from the consumer to the life insurance company.

Certainly, there are question marks about value for money at the moment but, in principle, an annuity is an excellent complement to drawdown. Annuities also help to avoid some of the issues highlighted by the Financial Conduct Authority and the W&PSC, such as consumers running out of money at a point when they are most vulnerable.

Perhaps the reason for the lack of discussion is that solutions seem a lot more elusive for the annuity market than for the drawdown market. Indeed, in 2014, the then-chancellor George Osborne realised annuities were not seen as offering great value. Instead of trying to fix the annuity market, however, he decided to turbo-charge the drawdown market.

So what areas can regulators and legislators look at? The recent report from the Pensions Institute, The Meaning of Life 2, raises some interesting points, including:

* Regulatory burdens, particularly the Solvency II regime and Prudential Regulation Authority-mandated increased risk margins, make it more expensive to write annuities.

* Depression of gilt yield prices makes it more expensive to write guarantees into longevity products.

* Given drawdown and annuities are both broadly vying for the same DC pots, pension freedom has reduced the market for annuity providers.

* There is a fragmented approach to policy and regulation – policies give with one hand then take back with the other.

All of these are areas that could be reviewed.

Skewed perspective

Consumer perspective is also skewed towards a ‘will I get my money back?’ mentality, which grossly undervalues the benefits of longevity protection. It is a lot harder to change mind-sets, so this is one where the value of advice – and guidance? – is key.

There is some hope though. The scope of the W&PC’s inquiry does touch on whether freedom and choice reforms are part of a “coherent retirement saving strategy”.  I am not one for buzzwords, but a review of the retirement landscape really does need a ‘holistic’ approach, and this has to include discussion about both drawdown and annuities.

That is because the bottom line is annuities and drawdown are the yin and yang of retirement planning. If we have an annuity market in good health, I suspect this will go a long way to alleviating concerns about the health of the drawdown market. It is only then that we can achieve a state of true harmony.

Martin Jones is technical resources consultant at AJ Bell