Retirement planning makes up a large proportion of business for advisers and is an area where significant value can be added. With myriad options to choose from, selecting – and monitoring – a retirement plan is extremely useful for many clients.
From small pots to large, those approaching retirement face huge challenges. Annuity rates remain relatively low (although the ABI is continuing work to encourage shopping around, most recently with the implementation of its code of conduct on retirement for its members), while low Gad rates pose a challenge for those taking drawdown.
With these issues in mind, advisers must work hard to find the right solution for their clients, taking into account both individual circumstances and external factors. But what are the options available and how are advisers using them?
The annuity route
For most who purchase without advice, an annuity is the most straightforward route. But even in an advised context, they can prove to be the right choice or a key component within a wider retirement plan.
Theoretically, anybody with a pension pot of any size can take an annuity. In reality, many providers have a £1,000 minimum when offering annuities to their own clients and £5,000, or even £10,000 or more, when considering pots from other pension providers.
For those with very small pots – under £18,000 in law – trivial commutation might be more appropriate, considering the very low income a small pot would produce. The ABI ‘annuity window’ published earlier this year revealed rates of as low as £839.52 for a pot of this size, ranging up to a maximum annual income of £1,099.92
Clients can select single or joint life for their annuity, an area where advisers can really add value – in many execution-only sales, customers opt for single life because the amount paid out is higher, neglecting a spouse who does not have a pension.
Another area where advisers come into there own is in relation to capital protection or guarantee periods offered by some providers. Standard annuities are for life; they cannot be reversed once purchased. Capital protection or a guarantee period can add peace of mind, a useful option for certain clients, although the additional cost will decrease the income paid at outset. A guarantee period is a cheaper way of protecting dependents than a joint annuity, although the period of income is usually around five years rather than for life.
Advisers can recommend a level, escalating or inflation-linked annuity. Although it would seem logical to seek inflation protection, income starts at a much lower level and takes a long time to catch up. According to the Money Advice Service, it takes 12 years for an escalating annuity to reach the same payout as a level one and 23 years for the total income paid to become equal.
“For most people, the long timescale to the ‘break even’ point and low starting income is a negative for inflation-linked annuities, as most folk want to maximise income whilst ‘younger’ and more mobile,” says Joss Harwood, chartered financial planner at Eldon Financial.