For example, the ‘core’ income requirement could be met through lower risk income sources such as state benefits and an annuity, while the ‘lifestyle’ income need through a drawdown strategy involving a mixture of a guaranteed income solution and a managed equity portfolio.
Products
For those who enter into drawdown it is important that all parties involved understand that drawdown is not a product. Drawdown is a strategy that may involve a number of providers and products all of whom need to be researched and evidence produced proving initial and ongoing suitability.
Continuing the theme of using different income sources for different income needs this table is designed to help illustrate the main options and the broad relationship between them.
When saving for retirement the strategy is accumulation. However, with retirement drawdown the strategy is for the majority decumulation.
These strategies have been identified as requiring very different investment philosophies and it is important to understand the differences and invest in assets that match the needs of the appropriate phase that your client is in.
Ongoing reviews
With retirement planning there are a few issues that require consideration with clients during periodic reviews:
1. Watch out for additional charges.
Not all drawdown providers can currently facilitate annual income changes. This is because they were initially designed for tri-annual reviews. Those providers who do allow annual and/or ad-hoc income reviews may charge extra for them.
It is therefore important to match the recommended products to the ongoing needs and expectations of your client and your service agreement with them
2. Update the client’s situation and re-assess suitability.
At each review after ascertaining and updating the client’s personal situation, needs and objectives it is appropriate to analyse the ongoing suitability of the solution
This should include the overall strategy as well as the underlying elements of income levels and sources, tax wrappers, platforms, product providers and investments. Do not forget to include an analysis of the individual and collective costs and service standards of each party
3. Review terms of business.
In our digital age it is relatively easy for clients to take financial advice initially and then after a while, perhaps with an eye on costs, opt for self-management of their drawdown strategy.
Advisers should insure that their terms of business are strong enough to rebuff claims from ex-clients. Especially those who find the investment strategy you recommended a few years ago is no longer prudent for them
Richard Hulbert is Insight Analyst (Wealth) with Defaqto
