Personal Pension  

How to choose the right blend of income

    CPD
    Approx.30min
    How to choose the right blend of income

    It is never easy to be a pioneer – to think outside the well-defined box and consider other possibilities rather than tread a familiar path.

    Indeed, Henry Ford – who most people acknowledge was a bit of a visionary – said: “If I had asked people what they wanted, they would have said faster horses.”

    So following the announcement of the Pension Freedoms in March 2014, the product development teams at various large financial institutions were essentially given a blank page. At either end of the client wealth spectrum, it was easy to see the solutions required; the challenge was the majority of customers in the middle.

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    Research by Partnership undertaken at that point suggested that investors wanted a guaranteed income for life (64 per cent) and the opportunity to get the highest income possible at retirement (31 per cent).

    They were also interested in an income that keeps track with inflation (24 per cent), a structure that minimises tax (21 per cent) and control over the amount of monthly income (17 per cent) in the form of a low-risk product (15 per cent).

    With the introduction of the Pension Freedoms, the previous dilemma of whether to go for a guaranteed lifetime income (an annuity) or flexibility with potential for a higher income (drawdown), has changed for the middle-market customer.

    It is no longer a question of which of the guarantees or flexibility is the right solution, but rather how much of their retirement provision should be guaranteed and how much should offer flexible access?

    Against this backdrop, hybrids and blended solutions were born. Both looked to meet client retirement needs, but with slightly different approaches. So, what exactly is the difference and is there a typical customer best placed to use them?

    Blended solutions use two separate products – generally an annuity and a drawdown product – often from two different providers to fulfil retirees’ needs. This bespoke offering is created by an adviser who has chosen options they consider to be the best fit for their client and their individual circumstances.

    On the other hand, a hybrid product brings together an annuity and drawdown inside one product wrapper, a self-invested personal pension wrapper.

    To avoid confusion, it is important to note that these hybrids are different from the HMRC hybrid pension schemes, as defined in the HMRC rules which refers to an accumulation plan that combines elements of defined benefit and defined contribution.

    While some providers chose to look at hybrids and blended solutions, others chose to renovate their annuity products and are now actively marketing variable or unit-linked annuities.

    These are neither hybrid nor blended solutions, but, for the right set of client circumstances, could be considered alongside these offerings or form part of a blended approach.

    However, to return to the topic in hand, while blended and hybrid approaches are different, they do share certain features and benefits. Using these models allows people to choose a level of guaranteed income to meet their essential day-to-day costs as well as some flexibility to take money out as and when if they need it.