If people were allowed to take greater incomes from drawdown due to their health, there is a real risk many could either run out of income or see their income fall very significantly if they live longer than predicted.
And we need to bear in mind expectations of life is not an exact science, it is an estimate. It works quite well on an ‘average' basis when we consider many people, but is much more difficult on an individual basis. Drawdown is an individual contract so there is no pooling effect.
Andrew Tully, Pensions Technical Director, commented: "Ill health should be a key consideration as people move into later retirement. Drawdown does not currently take into account lifestyle or health conditions. But simply allowing drawdown to pay higher incomes when health is poor creates a very real risk that people will run out of money, potentially falling back on state benefits. If people want to take their health or lifestyle into account a ‘pooled' concept is needed, alongside some underlying guarantee of income for life. Drawdown provides neither. But a solution already exists either by using enhanced annuities for those who don't want investment risk, or investment-linked annuities, using enhanced terms, for those looking to continue exposure to equities. This has the added advantage of the valuable mortality cross subsidy built into an annuity, which can be worth 2% a year for a 75 year old, substantially reducing risk for older people."
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