Your IndustryAug 25 2016

Suitability checklist for flexi-access drawdown

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Suitability checklist for flexi-access drawdown

For whom might flexi-access drawdown be appropriate?

Which sort of clients would benefit from such an arrangement, and how should advisers broach the subject with prospective clients?

According to Rod McKie, head of retirement propositions for Zurich: “For an advised customer, it would be appropriate either in whole or as part of their retirement planning, with the exception of the most risk-averse customers, who demand a guaranteed income for life.”

The fact it is a choice might prompt more people to consider the product, but as Aegon UK’s pensions director Steven Cameron comments, advice should be the first port of call.

It is also a product that might work best when used as part of a blended approach Ray Chinn

He says: “Increasingly, since the freedoms became available, more people are preferring the flexibility that a flexi-access drawdown plan offers.

“But it is not straightforward to choose and Aegon recommends individuals seek the support of a professional adviser.”

He has a list of eight top tips for clients thinking of picking a flexible drawdown product:

What to look for when picking a flexible drawdown product

A good range of investment funds

High-quality fund managers

Flexibility to vary the income taken

Option to choose guarantees for an exra charge

Access to advice

Online digital access and ‘what if’ tools to help keep track of the value of the pot

Competitive charges - not just at the outset, but ongoing

Offered by a regulated provider

Once this checklist has been ticked off, there are other factors to consider, such as the client’s overall wealth, risk appetite, tax situation and the client’s ultimate wishes - do they want to drawdown all the money eventually, leave some for their dependents, or retain a portion to pay for any long-term care further down the line?

Safety first?

Greg Kingston, head of communications, product and insight for Suffolk Life, comments: “Flexi-access drawdown should be suitable for any size pension fund for clients prepared to take an element of risk with their retirement savings into their retirement.

“The pension industry and its regulators have always adopted a safety-first approach, with the mantra that a pension fund must be accessed sustainably to maintain its value.

“However, real life does not operate to prescribed standards and it is perfectly reasonable to draw on a pension fund and see it run out during retirement, provided the client is prepared for the consequences.”

Zurich’s Mr McKie says advisers will need to keep an eye on the ongoing investment performance of the remainder of the fund, and advise on suitable portfolio composition.

He says: “The key is to help these customers invest in appropriate assets for their circumstances.

“For example, a client looking to extinguish their fund quickly over a few years is likely to benefit from cash-like investmetns or at least liquid or less volatile assets, to avoid any naasty surprises.”

However, research from Old Mutual Wealth in July, carried out by YouGov, revealed too few people are taking proper independent advice.

The research showed:

■ 60 per cent of those aged 50-75 who have never seen an adviser suggest they have little understanding of drawdown.

■ Only 38 per cent of people in this age bracket said they did not understand it even after seeing an adviser.

■ 40 per cent of those who have never seen an adviser claimed they have absolutely no understanding of drawdown.

Calculating the journey

Colin Simmons, retirement expert at Prudential, says: “Advisers might be more likely to recommend drawdown if the client has the requirements for a flexible income, without the absolute necessity of the maximum guaranteed income.

“In addition, tools and calculators can help personalise what the drawdown journey might look like.”

He presents an illustrative case study of one ‘David Webb’.

Case Study:

David Webb is 65 and wants to take an income from his pension pot.

He wants to take two large amounts in future for a holiday of a lifetime and also to help pay for his granddaughter to get married. He wants his monthly income to escalate to protect against inflation risk.

He is happy to take less income later in life in order to have a greater chance of not exhausting his pot and possibly have something left over for loved ones to inherit.

The Prudential retirement modeller graphic indicates how his fund might last through David’s taking of the two lump sums and the pace at which it would decline.

Based upon the assumption of a 5% growth rate, the fund would last until well past David’s 100th birthday.

The blue lines indicate income, the black line represents the value of the fund and the dotted line reflects his survival probability.

Capped or flexi?

According to John Lawson, head of financial research for Aviva, more clients may prefer to retain capped drawdown plans until they breach their withdrawal limits.

He explains: “People who had capped drawdown will keep that distinction until they draw more than permitted maximum allowed (broadly 150 per cent of an equivalent annuity).

“The big advantage of keeping capped drawdown is that savers can continue to pay £40,000 a year into their pension, rather than just £10,000 if they trigger flexi-access rules by drawing more than the capped drawdown maximum.

“It is unlikely that savers would voluntarily convert to flexi-access drawdown – rather they would simply keep it until they breach the limits.”

Indeed, Ray Chinn, head of pensions and investments at LV=, comments: “We find many advisers recommending drawdown as a ‘blend’.

“Customer needs vary by individual, as do their circumstances, and while costs for drawdown have fallen (which is helpful), this is still a product which requires advice.

“It is also a product that might work best when used as part of a blended approach, for instance, using drawdown with a secure income source, such as a lifetime or fixed-term annuity.”

Who is it for?

Aviva’s John Lawson sums up the types of clients for whom flexi-access drawdown might be suitable:

■ People whose pension savings can easily cover their fixed expenditure.

■ People wanting to maximuise the possible returns on their savings and have the risk tolerance and capacity for loss to permit drawdown investment.

■ People whose income tax rate may fall in the future.

■ People wanting to keep some money aside to pay the costs of long-term care.

■ People with substantial pension savings who wish to pass some money to the next generations tax-efficiently.

■ People who have assets outside a pension that will trigger an IHT liability.

■ People wanting to take their tax-free lump sum but leave the remainder invested for a later date.

■ Advised customers in the main but also self-investors confident enough to manage their own investments and their withdrawals so they don’t draw too much or too little.

Keeping an eye on tax

Previous articles in this guide have highlighted the benefits of passing money on at death tax-efficiently for inheritance tax purposes, as well as how advisers should keep an eye on what tax codes are being used by scheme providers.

David Trenner, technical director of Intelligent Pensions, says: “Drawdown is recommended if someone wants to manage their income tax by taking installments of tax-free cash in years when other income pushes them into a higher tax band.

“This could be in the year of retirement, when they have, say, six to nine months of earnings.”

However, Mr Lawson cites another tax matter of which advisers should be aware when discussing flexi-access drawdown with clients.

He says: “Flexi-access drawdown suits those savers who tax rate will fall in the future, as taking the tax-free lump sum first allows the taxable withdrawal to be defferred to a point where their rate of income tax is lower.

“People who expect their income tax rate to stay the same will find it more tax-efficient to use other withdrawal options, such as uncrystallised funds pension lump sump (UFPLS) where each withdrawal comprises a mix of tax-free lump sum and taxable withdrawal.”