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.
Royal London provide an on line new business tracker so that you are always kept informed and will allocate a named new business consultant to chase up any outstanding monies. Once we have the funds available we will also guarantee to pay out tax-free cash within 5 working days of receipt.
Product innovation
None of these services are new, we considered them to be essential when we launched. One of the reasons we think that there will be fewer new products than predicted is that there already exist a number of flexible products which are not being used.
“Third way” annuities, underlying capital guarantees and annuity underpins have all been available for some time. Certainly we expect to see some structured arrangements appearing which pull some of these themes together but whilst they deliver administrative simplicity any additional costs will of course impact on potential returns.
Royal London’s Income Release plan is already fit for the market it was designed for, and this just happens to be the market that is likely to expand significantly over the next few years – investors with smaller and medium-sized pension funds who want to delay annuity purchase without the addition of complicated features and any consequent expenses.
As a pension specialist company, Royal London is ideally placed to help you with these and other pension planning opportunities. If you would like more information please contact your local consultant.
