When helping work out the best decumulation solution, it is essential that advisers ensure clients disclose all their health issues as well as any lifestyle choices, such as smoking.
Clients who are in poor health may be able to obtain a much better annuity rate than healthy clients by use of impaired life - or ‘enhanced’ - annuities.
The average enhancement in the market is around 20 per cent, says Andrew Tully, pensions technical director at MGM Advantage.
“It’s likely at least 60 per cent of people qualify for an enhanced annuity, although take-up is significantly less, especially where people don’t take advice.”
Fiona Tait, business development manager at Scottish Life, cautions that this option still has the drawback that the income stream will stop when the annuitant dies, unless a joint life annuity is chosen.
However, she points out that a joint life annuity will reduce the initial income level, particularly for younger pensioners.
One of the key advantages of drawdown is that it gives clients the flexibility to take an income while in good health and then to shop around for the best annuity rate if they become ill at a later date, advises Alastair Black, head of customer income solutions at Standard Life.
On death any crystallised funds from drawdown can be paid as a lump sum minus a 55 per cent tax charge. Any uncrystallised funds can be paid as a tax-free lump sum if the member dies under age 75.
As well as the lump sum option, it is also possible to set up a dependents’ pension on death in a drawdown pension, which can either be a lifetime annuity, a drawdown pension or a combination of both.
If clients choose income drawdown it is vital that they have regular health checks to ensure they continue to make the appropriate decision, says Mr Tully.
Drawdown providers produce ‘critical yields’, the investment return which people need to maintain their annuity buying power.
“But these are calculated using conventional annuity rates,” he adds. “So if a client qualifies for an enhanced rate, the return they need in drawdown may be significantly higher and so make drawdown a less suitable option.”
