It seems that many advisers and their clients have woken up and smelt the coffee, realising that a combination of annuities and drawdown options may produce better outcomes than a single product solution.
The next step is to determine whether it is better to arrange this combination through a packaged solution or a DIY solution.
At present there are two hybrid solutions that package annuities and drawdown into one single plan and these are provided by Partnership’s Enhanced Retirement Account and Retirement Advantage’s Retirement Account.
It could be argued that unit-linked guarantees (guaranteed drawdown) are a type of combination plan because they offer guaranteed income for life and drawdown within one plan but they are not included in this discussion.
The DIY option can be arranged by purchasing a stand-alone annuity policy and investing in a separate drawdown plan. This is sometimes called a blended solution. Some companies such as LV= make it easy to arrange a DIY cocktail by having a flexible Sipp plan as well as providing planning tools.
Blended solutions and combination plans
A hybrid or combination plan is a single product package which provides both annuity and drawdown income.
The term blended solutions is used to refer a solution where more than one retirement income product; for example annuity, fixed term income plan or drawdown is used to provide a bespoke or tailored solution. These different products may be arranged as part of a single pension wrapper such as a Sipp or arranged as completely separate plans.
|Combination plans||Blended solutions|
|Overview||A single plan that provides a combination of annuity and income drawdown. Income is paid from the Sipp cash account and client receives one single income payment net of tax||A solution that comprises of separate annuity and drawdown plans. This may be under one wrapper, for example, Sipp or the plans can be from different providers|
Enhanced annuity offered
Low cost drawdown funds
One monthly payment
Simple and cost efficient
Not tied to one provider
Wide range of options
Benefits can be phased
|Disadvantages||Annuity purchased with plan provider. Limited range of investments||Can be complex and expensive to set and up and administer|
The strongest case for arranging a combination of annuity and drawdown options is that it should produce better client outcomes. But how do we know if a better outcome has been achieved? In most cases a superior outcome is obtained when the chosen solution satisfies the following criteria:
It meets current and longer term income requirements
Income is sustainable (after allowing for inflation) over the longer term
Ensures undue risk is not being taken
Provides sufficient flexibility to respond to changing or unexpected circumstances
Produces the appropriate death benefits
Is tax efficient
The hybrid or blended solutions help meet the above criteria in a way that single product solutions cannot by diversifying risk and providing ways of balancing the need for a level of guaranteed income with the need for flexibility.
So what is better: the packaged solution or DIY option?