Are these products just for higher net worth clients?

“There are other special circumstances, either as part of a high net worth client’s retirement plan or maybe for a client who wishes to defer purchasing an annuity for a given length of time,” he says.

Andrew Pennie, marketing director of Intelligent Pensions, notes that these products are restricted by minimum investment size which is often higher than a conventional annuity minimum investment.

“Segmentation by value can be dangerous and it is therefore necessary to have a detailed understanding of clients circumstances and all the market solutions to be able to present the most relevant solutions.

“In general, I think the larger a pension fund is, the less likely a third way solution, in isolation, is to be appropriate.

“We know guarantees are expensive and constrain growth and for larger pension funds, clients that genuinely value a guarantee must be questioned on the need to provide a guarantee across their entire pension fund.

Mr Pennie thinks third way solutions best sit in the mass-market arena where there is generally higher dependency on the pension fund.

Billy Mackay, marketing director of AJ Bell, notes that it used to be said that income drawdown products were suited to individuals once the pension fund they were putting into drawdown topped £100,000.

“One reason for this was charges, but with the low-cost platforms solutions now available, this no longer needs to be the case,” he says.

“The other reason for suggesting a larger pension fund was needed was the need for a cushion against the risk of investment loss.

“This is still valid, but with many individuals now able to draw a retirement income from a variety of pension and non-pension assets, the most relevant factor is not the size of the pension fund, but the value of all of an individual’s retirement assets and appreciation of the risks involved.”

Whereas pension drawdown offered through self-invested pensions usually has an annual administration charge plus additional costs if one-off payments or reviews are required, costs for third-way products vary depending on the provider offering the products.

Annuity-based contracts generally have lower costs than drawdown solutions, but with those reduced costs is usually reduced flexibility.

Mr Pennie adds: “While providers have packaged these products with competitive investment charges, the overall costs, particularly costs of guarantees, has made these contracts look relatively expensive.”

“On ‘like for like’ underlying growth the impact over a 20 year period of a 1 per cent annual guarantee charge on a plan with 5 per cent annual withdrawals could reduce the residual fund by as much as 25 per cent, which is an enormous price to pay for peace of mind.”