Peter Carter, product and marketing director at Retirement Advantage, explains the importance of tailored solutions when advising on drawdown options.
Q: What is the best way for advisers to approach conversations with clients around the various at-retirement decisions? How can they balance the traditional appeal of annuities with the benefits of flexible drawdown?
A: The key, as always, is achieving balance. In 2014, George Osborne announced that there was no need for anybody to buy an annuity again. However, the truth is people like the outcome an annuity gives them, although they may also want the benefits of a degree of flexibility.
The Retirement Account we offer provides a blend of the two, providing drawdown with the added benefit of an annuity that sits inside it. People can enjoy the flexibility of drawdown but also buy a certain amount of guaranteed income, perhaps covering their bills and living expenses and using the rest of the money as they wish. If they want to go on a round-the-world trip, they can do that.
A central part of any conversation needs to be about the client’s attitude to risk and also an assessment of how much they are prepared to lose. The adviser also needs to realistically assess how much the client needs to live on and what the base level of their financial commitments is and to make sure that is adequately covered by procuring that amount with an annuity.
Q: Recent FCA data indicates the number of people accessing their pension pots between October 2016 and March 2017 fell by 8 per cent, following a spike of 19 per cent in the preceding six months. Do these figures fit in with your experiences at Retirement Advantage?
A: I would say the figures are surprising to some degree, but it is fair to say that the market is fully developed now in terms of pension freedoms and a lot of people have already seen the opportunity to access their pension and have done so already. This has particularly been the case with people with smaller amounts, who have preferred to have the sum in cash.
Prior to the greater freedom being introduced, people typically would not consider going into drawdown if their pension pot was any smaller than £100k. Now people with a lot less – anything from £50k upwards – are going into drawdown. Now, more than ever, it is crucially important for those people to be given good advice.
Q: Why do you think combining drawdown with an annuity has proved so popular? How does it compare with simply transferring the pension value into a pure investment-based solution?
A: I think our approach has been popular among advisers and their clients because it removes a lot of the uncertainty associated with the equity markets. Quite simply, it is an approach that works well in providing stability with added flexibility.
At the moment, market conditions are relatively benign and we have not experienced the same volatility we saw during the financial crisis. However, we do not know what could happen in the future. Historically, during times when we see equity markets fall, people in drawdown have had to struggle to weather the storm. However, if you have a secure income you are better placed to be able ride it out. Markets can fall off a cliff and it does not really matter. That level of security is invaluable to many people.
However, for a lot of them, they do not want to sacrifice the freedom of drawdown altogether and that is where the Retirement Account comes in.
Q: What other opportunities might there be for clients transferring out of their original pension scheme?
A: Another attraction of opting to transfer a pension is the client may be able to restructure the benefits associated with the pension scheme. A good example of this could be changing the death benefits, perhaps structuring it so the capital value goes back to the family. Alternatively, someone who is single or divorced may want to forego the spousal benefit present in their current scheme. For a lot of people, ensuring the maximum amount is passed on to their dependents is a key priority.
By getting good financial advice, clients can reassess which benefits are important to them and what their ultimate aim is and restructure their scheme around this.
Q: You have spoken about the importance of covering financial commitments with the annuity component. How should advisers look to structure the drawdown element of the product?
A: There are actually a number of ways advisers can organise the drawdown plan. There is obviously the issue of working out the withdrawal rate and whether to opt, for example, simply to cancel the units each month or, alternatively, to take two-years’ of income in cash in order to ride out any volatility. There is also the need to structure the income drawdown portfolio in the optimum way to maximise returns while minimising risk.
Research we have conducted shows that the majority (94 per cent) of respondents often recommended medium-risk funds, with a further 74 per cent also opting for low-risk funds. This seemed to bridge the gap between the ultra-cautious guaranteed funds and higher risk options.
The overall message is that there are lots of ways of organising the drawdown component and advisers are encouraged to consider what might work better in different situations in order to achieve the best outcomes. There is a solution out there for everyone, but advisers cannot take a one-size-fits-all approach.
It is also important to note that clients’ circumstances change over time so it is important to regularly review their portfolios. In our survey, 82 per cent reviewed their clients’ accounts annually and I think this is a good benchmark to ensure the portfolios remain suitable for their requirements.
Peter Carter is product and marketing director at Retirement Advantage
Peter Carter has over 30 years’ experience in the insurance industry and a deep understanding of the adviser market, product design and the retirement space. At Albany Life he launched one of the first income drawdown plans in 1995. At Canada Life he developed the first flexible annuity in 2000, and at MetLife he was instrumental in launching variable annuities into the UK.
Peter led the rebranding of MGM Advantage and Stonehaven to Retirement Advantage, as Product and Marketing Director, repositioning the company to face the new pensions world, and led the launch of The Retirement Account; a combination of guaranteed income and drawdown within a pension drawdown wrapper.
The value of investments may go down as well as up. Taking income in excess of the growth in the value of the Pension Funds may result in income running out quicker than expected. Taxation rules and regulations may change in the future. Inflation will reduce how much your income is worth over the years. Retirement Advantage is a trading name of MGM Advantage Life Limited. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales. Registered office 110 Cannon Street, London EC4N 6EU.
