The order or the sequence of investment returns is a primary concern for retirees who are living off the income and capital of their investments.
“This is potentially a big issue for clients”, said Darren Cooke, director at Red Circle Financial Planning. “So far we have generally had strong markets over the short time flexible drawdown has been in place, so it hasn't been experienced yet.”
One option, he said, is to reserve a part of the client’s retirement fund in cash so income is drawn from this, not the invested element.
“This saves ravaging the fund for income in declining markets and you then top it up in rising markets. The counter to this is you loose out by holding cash rather than investing it when markets are rising so anyone doing this over the last two years has not benefited,” he said.
Another option Mr Cooke pointed out is to look at the so called 'safe withdrawal rate' – the rate analysts have calculated as that which you can withdraw from the fund and not run out of cash regardless of market sequence and in both boom times to crashes.
A safe withdrawal rate of 4 per cent per year (inflation-adjusted) is the rate that Trinity Study researchers recommended for 30-year retirements and is the rate most often quoted.
Technical hurdles
As well as these client-facing risks, advisers have also had to deal with some more ‘back-office’ technical issues.
The ‘scheme rules override’ meant pension schemes did not have to amend their rules to allow pension freedoms but they did have to allow a transfer to a scheme that did offer the pension freedoms.
This did not avoid the issue of exit charges, although they have now at least been capped. The Financial Conduct Authority announced in November 2016 that from 31 March 2017, early exit charges will be capped at 1 per cent of the value of existing contract-based personal pensions, including workplace personal pensions.
Early exit charges currently set at less than 1 per cent may not be increased. Firms will not be able to apply an early exit charge to personal pension contracts entered into after these rules take effect.
Advisers advising on their clients’ exit from one scheme to go into another also have to ensure the receiving scheme does offer the specific option required, namely flexible access drawdown and / or uncrystallised funds pension lump sum.
Also, not content with the radical changes brought about by pension freedoms, in the Autumn Statement 2016 the government announced it would reduce the money purchase annual allowance to £4,000 from £10,000.
