Personal Pension  

Defaqto outlines benefits of hybrid pension products

Defaqto outlines benefits of hybrid pension products

‘Hybrid’ retirement products which seek to offer pensioners a third way between annuities and drawdown in the wake of pension freedoms, can help clients looking for a more flexible retirement income, according to a report by Defaqto.

A hybrid product tries to marry up the guaranteed income provided by an annuity along with the flexibility of drawdown.

They differ from what are known as ‘blended’ solutions in that the income producing assets are held in a single pension wrapper, rather than separately.

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According to Defaqto, the key advantage is of hybrid products is a investors’ assets are held via a trustee investment, meaning the income sources and the income they produce are both held within the tax-efficient single pension wrapper.

Examples of retirees for whom this may specifically benefit include those currently in poor health, along with those who expect to recover and so are in immediate need of a secured income, but require it to be reduced or stopped in the future.

Additionally, it hybrid products also of use to those who wish to receive an income prior to state pension age to cover fixed expenditure, which can then be stopped or reduced as the state pension income comes through.

Defaqto added those who wish to manage their income within specific boundaries - for example utilise their full standard rate tax allowance, but not pay higher rate tax - can benefit from hybrids.

Those who expect to inherit, but need a secure income in the meantime, along those who wish to reduce working hours prior to full retirement and supplement their reduced income, would also benefit.

Summary of hybrid solutions

BenefitsIssues
Take control of investment strategy

Get the investment strategy wrong and/or draw too much (income) so the capital value will be decreased, as will the future likely income available and/or inheritance tax planning

Choose the level of flexible income via drawdown

Ongoing costs to be considered and reviewed

Vary the level of secured income from annuity by diverting to drawdown

Requires ongoing assessment of the suitability of every aspect

Element provided by the insurance company covered 100 per cent by FSCS

Lower levels of protection if under client money regime as opposed to insurance regime

Upon death, able to spread payment to beneficiaries to minimise tax liability

ruth.gillbe@ft.com