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Alternatives to multi-asset for retirement income

This article is part of
Guide to Multi-Asset and Pensions

Final salary scheme income and annuities may be inflexible, but Mike Parsons, head of UK funds sales at JP Morgan Asset Management, says they come with the certainty of lifetime income - not something that should be tossed aside lightly.

In particular with final salary schemes and others offering guaranteed annuities the income can also be extremely favourable relative to most alternatives and the equivalent cash value.

While some many reasonably seek to exploit the freedoms to get their hands on cash for a particular purpose, the regulator currently remains of the view that most transfers from defined benefit schemes especially are unlikely to be in the client’s interest.

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Mr Parsons says the worry is that investors may not have access to the right information to help them make prudent investment decisions for their financial future. He says that is why it is down to the financial advisory community to step up and meet the surge in demand for pensions advice.

Where a final salary saver has pots of more than £30,000, full regulated advice must be sought before transferring. There is no such demand for those moving from a scheme with a guaranteed annuity, for example, but providers must highlight risks and signpost to Pension Wise guidance.

Outside of these secure income options, the core options sanctioned in law are new flexi-access drawdown, which is an ultra-flexible variable option that no longer requires minimum guaranteed income; or taking cash from the pot on an irregular basis or in full.

Those taking the cash in full may be doing so to go on a spending spree, but most prudent pensioners would likely be doing so to pay down debt or provide income outside of a pension environment, most likely through buy-to-let property.

This latter is expected to see major inward investment in the coming months and years; we Brits love the tangible asset property represents, after all.

But putting all your fund in a residential housing investment does bring with it liquidity concerns that mirror some of the old annuity drawdbacks. The tax implications of withdrawing your lump sum and then that arise when buying the house, are also an important cost consideration.

For drawdown (or the drawdown-style element of hybrid solutions such as unit-linked guarantees and other ‘third way’ products) or cash withdrawals, the fund remains investment. Mr Parsons therefore argues the top priority for advisers is solving the post-retirement investment conundrum.

According to Mr Parsons challenges facing investors are:

1) Most of us will live longer than we think. If you are 65-years-old today, Mr Parsons says there is a 66 per cent chance that you or your spouse will live past 90-years-old.

2) Higher inflation means lower purchasing power in retirement. Price increases in particular categories - notably medical care - tend to have a disproportionate impact on older people.

3) The hunt for yield continues as the squeeze on income tightens. Since 2007, average yearly council taxes are up 11 per cent; household electricity bills are up 30 per cent; the annual costs of running the family car and paying the family food bill are both up a shocking 60 per cent.