Tools of the trade

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This is not a new issue because we have had people going into drawdown under the older rules for many years. The difference now is that the numbers will likely be much higher as flexi access becomes the potentially default approach where once most retirees simply swapped their pensions for an annuity. See the share price falls in the annuity providers for an indication of market sentiment on this point.

The risk here is not that retirees are buying Lamborghinis but instead that they may not know how to go about providing themselves with a lifetime income to meet their needs. The adviser community is not large enough to provide them all with initial and ongoing advice and many will not be willing or able to pay for advice.

Retirees may perceive annuities as poor value but some certainty of income, as well as capital control, is still high on the list of their needs.

Fund management groups are looking at this area with interest. A large new market will open up to those that can come up with products which meet retiree objectives. Traditional life companies and annuity providers will also be actively looking at new ideas.

There is no free lunch and any marketing material which talks about a guarantee or a targeted income needs to be looked at very carefully. Ultimately, a guaranteed income can only come from an annuity and the current rates of annuity are a good indication of how much such a guarantee costs. However, there are new or at least retooled ideas which will appeal to some retirees who do not want to self manage their own portfolio or to use an adviser on a fully engaged basis.

Multi Asset Funds

These are not new but are seen by some management groups as a potential solution, especially within DC pensions. As the name suggests, the manager will invest across all or most sectors and not just in equity and bonds. Therefore the approach will be similar but on a larger scale to that taken within an adviser’s model portfolio or by a DFM. The fund will often be large and costs moderate. The manager will be able to use natural income to cover drawdown rather than necessarily sell assets during a downturn, thereby potentially avoiding forced sales which could lead to a loss. Clearly the investment approach taken will not be bespoke to the client. Most of the major fund houses have funds in this area.

Multi Strategy Funds

These are similar to Multi Asset Funds but with the added ability to use traditional hedge fund methods to potentially add to performance. Again, not a new idea but they can use strategies to control volatility and target income which may appeal to investors. Any such controls or targets will be dependent on the skill of the management team and must not be seen as guarantees. Absolute return funds are in the same space as multi-strategy and have not always delivered the promised results. Aviva have launched several multi-strategy funds which have performed well in recent volatile markets.

Short Term Annuities

A retiree who does not want to buy a lifetime annuity can instead buy a short term guaranteed income with return of capital at the end or upon death. This gives certainty of income at the cost of medium term flexibility and potential investment performance. The retirees can then buy a second annuity or invest in a portfolio. Providers such as LV= are updating their range.

Flexible Annuities

A retiree can buy an annuity where the income can be reset each year but where it cannot go below a minimum. The Prudential is active in this area and include an element of investment-based returns which can increase the potential income. The retiree has certainty and some control over income but no access to capital. Death benefits are also usually limited after any guarantee periods.

Guranteed Life Income Benefits/Variable Annuities

This is a popular idea outside of the UK but may now grow here. MetLife and Aegon have recently revamped their product ranges. The concept is to invest in a vehicle within the pension which will provide a minimum guaranteed growth rate in the run up to retirement . Thereafter, the income is also guaranteed at a fixed rate, either for life or a fixed term but the retiree maintains the option to take cash and full death benefits. Therefore certainty of income and potentially capital value for the retiree plus some flexibility. The downside may be the cost of the guarantees and the complexity of the product but certainly worth consideration.

New client objectives

Not all retirees need income from their pension and the new treatment of pensions on death have created a position where in some cases best advice is to keep the pension intact as long as possible in order to pass it on to family as part of an estate planning strategy. Gross roll up within a pension which can then be passed through a generation provides a compelling reason to keep a pension intact. This applies even after age 75 when nominated beneficiaries will pay income tax which could be more than IHT. Retirees in this position will have very different investment objectives as well as more need for advice on their holistic planning.

There are also an increasing number of people who will be affected by the Lifetime Allowance. Here, ‘excess’ growth on investments can result in a tax charge and therefore the approach to risk, withdrawals and crystallisation of benefits may need to be approached with this in mind.

Advice

My view is that pensioners should take advice before making a decision about one of their biggest assets. Ongoing advice is also to be recommended in what has proven to be a rapidly changing and innovative market. A financial plan is fragile and should be reviewed on a regular basis.

However, there are new options on offer to pensioners retirees who want to self -serve or who want to seek advice only on an occasional basis. Advisers will also have options for clients who want a light touch service.

Providers and fund managers will continue to design new products and exciting times will continue in the world of pensions.

Neil Sadler is a chartered financial planner of Lift-Financial

Key points

Retirees may perceive annuities as poor value but some certainty of income, as well as capital control, is still high on the list of their needs

The approach of multi-asset funds will be similar but on a larger scale to that taken within an adviser’s model portfolio or by a DFM

pensioners should take advice before making a decision about one of their biggest assets