An adviser has warned about the perils of treating every drawdown client in the same way, an approach, he said, was commonly adopted by his peers.
Neil Liversidge, managing director of West Riding Personal Financial Solutions, has identified six different types of clients and come up with tailored approaches to meet their specific needs in drawdown.
He said: “We frequently see drawdown advice by other advisers brought to us by clients wanting second opinions.
“From what we see, most seem to think all drawdown clients are the same. They aren’t. Each needs his or her drawdown managing appropriately.”
Drawdown was made accessible to the mass market by the government’s pension freedom reforms in 2015, which gave all savers over the age of 55 unfettered access to their savings.
Since then, drawdown sales have surged while the traditional retirement product, the annuity, has suffered a stark decline.
Consumers do not need to seek advice on entering income drawdown, although the regulator is currently investigating the non-advised drawdown market with a view to possibly introducing further consumer safeguards.
1 The “deferred drawdown” client
The first type of clients identified by Mr Liversidge are those looking for deferred drawdown, meaning they are looking to take their tax-free cash with a view to buying another pension product later down the line.
This could be people looking to pay off debts, or to endow their children with money for a deposit to buy their first house.
“These, for us, are straightforward investment cases,” said Mr Liversidge. “We take the money from a plan that can’t facilitate what they want and we move it to one that can.
“Thereafter we manage the pot of money, aiming to grow it as much as possible until such time as they do want to use it to provide a regular income.”
When the moment arrives, he said, the advice on how to structure retirement income begins.
2 The “annuity-substitute drawdown” client
These are clients that ideally would like a secure income for life, but for some reason have a serious aversion to annuities.
“These clients are the toughest to advise, and for us the riskiest,” Mr Liversidge said.
The adviser said he typically tries to persuade them to buy an annuity before entering a discussion about drawdown.
But their attitude was “understandable”, he said, because of the prevailing low annuity rates in the market.
The rates hit rock bottom in 2016 but data from Hargreaves Lansdown, released in November, showed the market was recovering - there were eight rate changes in the month to 23 November alone.
3 The “strip-down drawdown” client
These are clients that have been captured by the government’s forced annuitisation process in the past.
They may want to retire early and bridge the gap until their state retirement pension and occupational pensions kick in.
Some may have decided £20,000 or £30,000 was more use to them as a one-off lump sum than as an annuity of maybe £20 or £30 per week for life, Mr Liversidge said.
Others may simply fear a change in government policy reintroducing forced annuitisation, he added.
He said: “Many such people hit retirement with debts still outstanding. The income freed-up, and peace-of-mind achieved by clearing debts, makes cashing their pension plans worth it for them.”
He said the advice was typically to strip-down the pot over several years, to keep clients under their personal allowance and avoid a tax charge.
The problem with those who want to have control of their savings was they often only put the money in the bank, Mr Liversidge said.
He said: “We explain that ‘it’s still theirs’ in the pension pot, it’s more tax efficient to keep it there until they actually need it, and that drawing it all in one go is tax inefficient.”
He called on the major political parties to commit to not reintroducing compulsory annuitisation to “remove such clients’ current incentive to make bad decisions”.
4 The “gap-fill drawdown” client
Again, these clients typically want to retire early – at about age 60 – and to bridge the income gap until their occupational or state pensions kick in.
But, in contrast to the "strip-down" clients, they are focused on making their drawdown last throughout retirement.
“Where clients have personal allowance ‘headroom’ we typically cross-fund into ISAs to minimise their long-term income tax liabilities, as ISA income, unlike pension income is tax-free,” Mr Liversidge said.
There may be clients crossing over between this and the strip-down category.
5 The “live-it-up drawdown” client
‘Live it up’ drawdown clients are those with small-to-medium sized pension pots who want 10 to 15 good years out of it.
They may not be in great health and want to enjoy their money while they are still fit enough. After that they want to live on their state pension.
Mr Liversidge said, contrary to popular belief, it was possible for people to live on the state pension alone.
He added another typical sentiment was: “‘I don’t want forty quid a week from an annuity just going to pay nursing home fees when I’m 90. I want to have a good standard of living early in my retirement, not a little bit of money every month forever, that’s worth less and less with inflation.’
“These are phrases actual clients have used to us. Repeatedly. We deal with it,” he said.
He added: “If they stay healthier longer than expected however, then equity release might also be an option for them.”
6 The “inheritance planning drawdown” client
Mr Liversidge describes these clients as having significant wealth and a likely inheritance tax liability, whose pension fund forms just one part of it.
IHT rules were changed as part of pension freedoms, which abolished the punitive 55 per cent pensions "death tax".
From April 2015 the pension of a person dying before the age of 75 can be passed on free of tax.
For people dying after the age of 75 pensions passed on are taxed as income at the beneficiary’s rate of income tax.
Mr Liversidge said: “Their intention is to leave their fund untouched so far as is reasonably possible, because they rightly see its preservation as being a good way for them to pass on wealth inheritance tax free.”
carmen.reichman@ft.com
