Pensions 

Income drawdown – investing for the masses

This article is part of
Income Drawdown - March 2015

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We look at the key features required of a drawdown plan which will meet the needs of those entering the new drawdown market.

Simple charges

For smaller pot sizes a single percentage-based charge is most likely to deliver value, and it is essential to ensure that your clients are only paying for the services which they actually use.

A drawdown facility may be offered as an extension to a basic personal pension contract but any additional charges should only apply once the facility is in use. Historically also some drawdown contracts have contained several layers of charges which help the provider to cover their different cost bases but make it impossible to compare different products or to accurately predict what the client will actually pay over the lifetime of the plan.

Most providers are now beginning to recognise that the number of separate charges on a single drawdown contract should be kept to an absolute minimum, and should also be easily explained to the investor.

Royal London’s Income Release plan is based on a core personal pension with a single annual management charge (amc) and a one-off charge currently of £180 which applies when and if the client decides to enter drawdown.

Investment income options

Income drawdown can be used to release a lump sum at retirement, and/or to provide ongoing income. In the latter case it will be necessary to alter the investment strategy so that it is suitable to deliver ongoing withdrawals.

This means that the overall portfolio should contain suitable income-producing assets and that there should be a mechanism in place to help protect against any short term losses which would have a detrimental effect on future income.

It is also necessary to consider income sustainability and to set up a portfolio that is at least capable of generating the returns required to support the desired level of income as long as this fits with the client’s attitude to risk. With the removal of income limits under drawdown post April, stochastic modelling tools will become invaluable in helping advisers to manage client expectations.

Royal London’s income planning tools assist advisers to assess a client’s attitude to risk and capacity for loss, select a suitable income portfolio within these parameters and identify a level of income which could be sustained through different investment conditions.

Efficient administration and support

Most importantly a drawdown contract must be capable of paying out the client’s money as and when they want it.

For most clients the first test of this is the payment of tax-free cash at outset. This is in turn dependent on when the funds become available and waiting for monies to be transferred from existing savings contract is often the limiting factor. Once again it is crucial to manage client expectations and to keep them aware of progress at all times.