Personal Pension  

Beyond the single product solution

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With pension freedoms comes responsibility

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.

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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 plansBlended solutions
OverviewA 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 taxA 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

Maximum flexibility

Benefits can be phased

DisadvantagesAnnuity 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?