Confusion about third way pensions

The confusion has perhaps been compounded by the fact that some providers and products have entered the market only to withdraw a short time later, which is likely to have damaged some credibility of ‘third way’ within the adviser market.

“In my opinion,” says Mr Pennie, “some of the solutions are too expensive and some of the contracts are too complex and this is a consequence of guarantees which are costly to provide and complex to manufacture – look at structured products which have encountered similar problems.”

However, he concedes that third way solutions have their place in the market for clients who understand and genuinely value the guaranteed element.

“Advisers can’t afford to ignore third way products in the same way they can’t afford to ignore annuities and income drawdown. Failure to consider all retirement options could be a failure on the grounds of TCF.”

Alan Mellor, managing director at Phillip Bates & Co, also agrees that third way products are too expensive to be widely used but are “ideal for a few”.

“A solution could come from increasing the flexibility of fixed-term annuities, possibly allowing clients to phase their crystallisation over the term or allowing uncrystallised funds to purchase an FTA or such product.

“A lot of clients are fed up with poor returns from their funds and are looking to tie an uncrystallised fund up until their retirement date for a given return but unfortunately unless they have a fund large enough for a Sipp then there aren’t many options open to them.”

The headlines regarding drawdown pension in recent years have focused on the debate over the most appropriate level for the maximum annual income, notes Billy Mackay, marketing director of AJ Bell.

“This has encouraged the debate on the relative merits of annuities and drawdown to focus on the assumption that drawdown investors typically take the maximum income.”

He says only around a fifth of drawdown investors are taking the maximum income at any one time, with a smaller number doing so year-on-year.

“There are risks in taking the maximum income,” says Mr Mackay, “but so few investors do so regularly that it is a misconception to base the debate on this being the norm.

“Most drawdown investors place a greater value on retaining control of the capital and the flexibility to adjust their income rather than the ability to take a higher income than an annuity every year.”