Financial advisers are reporting a surge in clients accelerating drawdown ahead of pensions becoming subject to Inheritance Tax (IHT), according to new research from Wesleyan.
The vast majority (90%) of advisers said they had seen an increase in clients accelerating pension drawdown in anticipation of the reform, which comes into effect in April 2027 and will see unused pension funds included in IHT calculations for the first time.
When asked by how much clients are typically increasing their annual pension withdrawals due to IHT concerns, three quarters (74%) of advisers said between 5% and 15%, while nearly a fifth (18%) said by more than 16%.
Advisers are worried about the long-term impact of accelerated pension drawdown on their clients’ finances. Nine in ten said they were concerned about volatility drag (90%) – where market fluctuations erode returns over time – and sequencing risk (88%) – the danger of poor investment returns early in retirement reducing the sustainability of withdrawals.
They are also worried that increased market volatility during accelerated drawdown could affect their businesses, with 93% saying it poses a risk to their recurring income.
Karen Blatchford, Managing Director of Distribution, said: “While it’s understandable that clients are looking to act ahead of IHT changes, advisers know that increasing withdrawal levels can have significant consequences, especially in the uncertain and volatile market conditions we’re experiencing today.
“That makes it vital that any changes to withdrawal strategies are supported by robust planning and advice to help clients maintain long-term financial resilience.”
Wesleyan’s research also reveals that advisers are helping clients accelerating drawdown due to IHT concerns adjust their asset allocations to mitigate the impact of issues such as sequencing risk and volatility drag.
Nearly half are seeking further diversification opportunities in their clients’ portfolios (49%) and advising them to invest in specific sectors or markets (45%), while almost two thirds (58%) are starting or increasing investment in smoothed funds that actuarially adjust for market volatility to ‘smooth’ investment returns.
Karen Blatchford added: “Solutions that can help to manage volatility are becoming increasingly important. Smoothed funds offer a way to reduce the impact of short-term market fluctuations, helping to provide more stable returns for clients in or approaching drawdown.
“By smoothing out the peaks and troughs of market performance, they can play a valuable role in mitigating sequencing risk and volatility drag, supporting more consistent outcomes and helping clients stay on track with their retirement plans.”
