How many options are there now for clients?

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Supported by
Scottish Widows
How many options are there now for clients?

Many of these can be used alone or in combination with other pension products, while some may be more suited to those in the early years of retirement, to be replaced by another product when they get older.

Understanding what the client’s needs will be when they retire and the type of pension they have been saving into throughout their life, will naturally whittle down the most suitable product for them.

Scott Gallacher, chartered financial planner at Rowley Turton, lists the range of pension products available:

  • Annuity
  • Fixed Term Annuity
  • Drawdown (existing capped and new flexible)
  • Uncrystallised Funds Pension Lump Sums (UFPLS)
  • And a number of phased variations or combinations of the above.

In itself, drawdown is not a new concept, as Gareth James, head of technical resources at AJ Bell, reminds people.

“It is important to remember that drawdown has been allowing savers to alter the amount they take from their pension for more than 20 years. What has changed is the complete removal of government set income limits, and drawdown being seen as a viable option by many more savers than was the case pre-freedoms,” he explains.

Old product, new tricks

Among that list is an entirely new product though.

Mr James notes: “Uncrystallised Funds Pension Lump Sums (UFPLS) is the one completely new option which has taken off. 

“This is simply where savers take ad-hoc lump sums directly from their pension rather than setting up a regular income stream. A quarter of each UFPLS withdrawal is tax-free, with the rest taxed at the saver’s marginal rate.” 

He observes: “UFPLS has been particularly popular with those holding more old-fashioned pensions which don’t offer drawdown as an option, as it is their only way to make use of the freedoms without transferring to a new provider.”

Fiona Tait, technical director at Intelligent Pensions, outlines three main retirement options for individuals with defined contribution (DC) pension plans, ranging from “the extreme option of taking it all in one go at outset, to the more traditional route of spreading it as income across the remainder of their lives”.

She says: “UFPLS may be used to achieve the former approach, or to provide a series of tax-efficient lump sum withdrawals over time; while Flexi-Access Drawdown (FAD) and annuities may be used to provide regular income.”

Then there is the ability to combine some of the options.

“These options may also be used in combination either sequentially or in tandem; commonly FAD or UFPLS will be used earlier in retirement to maintain flexibility, while an annuity may be used later on when income needs are more predictable,” she points out. 

“UFPLS and FAD are not available to members of defined benefit (DB) arrangements and members of those schemes have to transfer to a DC arrangement in advance of taking benefits, if the benefit of having the additional flexibility outweighs the advantage of the guarantees that apply to benefits withdrawn from a DB scheme.”

The perceived complexity of pensions, particularly under pension freedoms, means many clients will be seeking advice. 

Those who do not already have an adviser or who feel they can navigate the pensions landscape themselves, may well run into difficulties – particularly when it comes to tax.

“Pension savers have a number of choices from age 55,” admits Stephen Lowe, group communications director at Just.

“Many will leave the pension untouched until nearer retirement, benefiting from further accumulation and growth in a tax-efficient environment. 

“Changes to the tax applied to residual funds on death, which are outside the estate for inheritance tax purposes, have opened up new financial planning opportunities for those who have other sources of income and don’t need to touch their pensions,” he explains.

On the table

For many people, the benefit of purchasing an annuity will outweigh all the other options.

Increasingly, retirees are buying an annuity partway through their retirement when stability of income takes priority over flexibility.

Mr Lowe suggests: “Clients can still buy guaranteed income for life solutions and should shop around, ensuring they are fully assessed for enhanced rates based on their own health and lifestyle information.”

Drewberry’s pensions and investments expert, Neil Adams, confirms: “Although drawdown contracts have increased markedly since the pension freedoms, annuities are still an option on the table. 

“While low rates have deterred many from making an annuity purchase in recent years, annuities can still form part of the bedrock of retirement planning for those who want a secure, stable income for the rest of their lives.”

The range of options available is wide and allows for several different combinations.

Just how can advisers make sure their clients end up with the right retirement solution for their later life requirements?

Verona Smith, head of platform at Seven Investment Management, urges that options should not drive the outcome.

“Clients need to start with assessing their needs – the need at this stage not being what is the product and investment solution, but rather what do they need to support their short-term cash needs, their medium- to long-term retirement needs and what they would like to leave (if anything) to their children,” she suggests.

“The next step is building the plan. This is where clients, with their advisers, should be making the most of the tax-efficient wrappers available to them and investment solutions which meet their required target returns.”

Finally, she says: “Then it is all about making it all happen in an efficient and cost-effective way.”

eleanor.duncan@ft.com