What sort of blended solutions work best?

According to Steven Cameron, pensions director at Aegon, there is such a variety of different options now for people at retirement that any solution requires a lot of thought.

Defined benefits

This is particularly so when the pension involved is a defined benefit pension. 

He comments: “One of the big trends in advice is people asking for a view on whether they should convert their defined benefit pension into a defined contribution one.

“There are clear pros and cons either way but we think there is scope to make greater use of partial transfers from DB pensions.

“This would allow them to move a portion of their benefits to DC while retaining a guaranteed and often inflation-proofed income.”

Mr Cameron suggests another blended option of this sort is for the individual to go into drawdown with some guaranteed income element, to benefit from potential investment growth underpinned by some certainty of regular income.

It is important before using a blended strategy that advisers do a thorough review of their clients’ needs and assess their risk appetite. Kim Lerche-Thomsen

The key thing is flexibility. As a spokesman for LV= points out: “Choosing a blend of retirement products can give retirees the flexibility to be able to adapt their income to their changing needs throughout retirement.

“Taking out a fixed-term annuity can ensure customers are able to top up their income, while ensuring ‘guarantee’ at the end. However, some consumers may prefer to start with drawdown when they are likely to be in better health and more capable of making decisions.

“They then have the option in later life, perhaps when health has deteriorated, to take out an enhanced annuity which will give them peace of mind and a secure income.”

Therefore, because everyone’s income and capital needs are so different, it is important to point out that no one particular blended solution is the best for all.

However, some sort of blended solution can be an appropriate choice for many pensioners. 

William Burrows, retirement director for Better Retirement, comments: “The best blended solutions are the simplest, and usually combine annuity and drawdown.”

Assessing the time horizon

The plan depends entirely on the individual client’s needs both at outset and during their retirement. 

Fiona Tait, technical director for Intelligent Pensions, says these combinations can be put in place either from the outset or over time.

She explains: “Many retirees require income flexibility in the early years and more security as they get older.

“They may therefore start out invested in drawdown and phase annuity purchase over time, or they may start out with an annuity underpin to secure their minimum income requirements, and then use the remainder of their funds to invest for more growth.”

Mr Burrows agrees the blending does not have to be “on day one”. He adds: “It might be better to blend as you go along, and purchase some annuities as the client gets older.”

But the possibilities do not end there. Ms Tait continues: “It is also possible to follow these patterns within a hybrid product which combines elements of both growth and security. 

“This has the advantage of delivering a single income payment.”

According to Andrew Tully, pensions technical director for Retirement Advantage: “This kind of solution can help cautious clients manage the balance between market exposure and protection as they move through later life.”

Income requirements

The client’s need for income is also something that will need to be managed well throughout retirement, not just at the outset. 

For this, the flexibility of blended solutions can be a good fit. Take the following examples from Femi Folorunso, senior consultant at Mattioli Woods. 

He says the firm has some clients whose income needs are “delicate enough” to require income guarantees up to a certain level.

However, any amount above these guarantees is necessary, but not vital. He says: “Such clients may opt for a blended income strategy using a final salary plan (if they have one historically), in combination with an income drawdown plan."

In other cases, the firm has clients where the guarantees are required for a short period of time, for example where the individual is waiting for the state pension to kick in. 

For these clients, he advocates: “a combination of fixed-term annuities and income drawdown plan”.

There could also be a need for some clients to buy a fixed-term annuity while waiting for state benefits to kick in, as the case study from Canada Life shows. 

Meeting clients’ income needs at and during retirement therefore is not a set-and-forget, one-off piece of advice work. It’s a very personal, tailored solution that needs to be revised regularly.

Investment choices

For Lorna Blyth, pension investment strategy manager for Royal London, the best possible blended solution is one where the investment strategy works, not just at the outset but throughout.

She explains: “It needs to deliver growth with reduced volatility in order to cope with the effects of sequencing and inflation risk.

“However, it’s not just about the investment choices; ideally it should include a regular review process so there is an understanding of how the asset mix will perform in different scenarios.

“In my view, it must be risk-managed and should be part of a process that helps the customer understand what a sustainable income level looks like, how long they might live for and all reviewed continuously.”

Kim Lerche-Thomson, founder and chief executive of Primetime Retirement, agrees a blended strategy can work well in that some retirees can have the opportunity to preserve and grow their investment in the longer term.

Yet he adds a note of caution: “It is important before using a blended strategy that advisers do a thorough review of their clients’ needs and assess their risk appetite.” 

Downsides

There are some possible downsides to using a blended solution in particular, apart from the hazards of suitability, sustainability, taxation and sequencing risks that are covered in a different article to this guide.

For blended solutions especially, complexity and expense are the two major ones to consider.

The more flexibility there is on offer, and the greater the number of potential combinations, the more complicated the end retirement plan can become.

Ms Tait explains: “While hybrid products have the advantage of delivering a single income payment, the underlying product may be complicated or restrictive.”

It can also end up more expensive to create a range of solutions, on top of the initial or ongoing advice fee, investment management fees, product fees and any taxation that might arise at any particular time.

Mr Lerche-Thomsen adds: “While blended strategies help to diversify risk and provide some additional security compared with pure drawdown options, it is vital to evaluate whether a blended strategy will be the best option for retirees, based on their needs.”

But as Mr Folorunso comments, blended strategies are “client specific” so may be the only real option for some clients to ensure their needs are met.

He concludes: “There is no one-size-fits-all solution. It all depends on the client’s circumstances and all options being considered, using the facts known. 

“It is all about knowing your client well.” 

simoney.kyriakou@ft.com