Meeting the challenges of providing income in retirement

Today’s clients need to more fully understand the range of solutions to ensure a better chance of a decent income when they finish working.

For independent financial advisers involved in the fiercely competitive at-retirement market these are difficult times, with the lowest-ever annuity rates making it extremely difficult for them to know how best to serve the needs of clients, according to the Prudential’s Vince Smith-Hughes.

The company’s head of business development believes it’s as challenging to put together viable solutions for those approaching retirement as it is for those that are currently within income drawdown and struggling to maintain the desired income level.

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“It’s a tough time for advisers who are faced with a number of choices,” he says. “They can choose to leave clients in drawdown; move them into other funds, such as those offering guarantees; or switch into some form of annuity. Each route has its positives and negatives.”

For example, if they decided to stick with drawdown, the client would have to be made aware of the potential downsides of maintaining existing income levels - which is basically that both their fund and future income are likely to be significantly eroded.

Basically, it all comes down to the type – and amount – of risk that a client is prepared to take, points out Smith-Hughes, who is adamant that everyone will have to accept some potential downside unless they have a multi-million pound pension pot and can buy an RPI-linked annuity, giving them the starting income they need.

“If advisers speak to clients about all the risks that exist – including dependency risk that looks at what would happen if they died – then more of them would understand the need to accept and perhaps trade risk,” he suggests. “They just need to be taken through the various possibilities.”

For example, should they opt for a level annuity, they’d need to know the risks that will be posed by inflation rather than any investments. Conversely, buying drawdown in its traditional form would mean accepting investment risk in exchange for diluting the longer-term effects of inflation.

“Virtually everyone has to accept some sort of risk but they need to know what those risks are and then they can decide if they’re happy putting all their risk eggs in one basket,” he says. “An option could be middle market products which strike a balance between inflation and investment risk.”

It’s a key development. Over the last couple of years a number of retirement specialists have been suggesting ways of combining various solutions to meet the needs of particular clients. This is a trend which Smith-Hughes believes will become a permanent part of an adviser’s armoury.

“People no longer need to choose one product because mixing and matching is becoming popular,” he says. “I’m a really big fan of this approach because it means skilled advisers are able to look at all the risks on the table and then suggest products that offer the best possible bespoke solution.”