How to assess ongoing drawdown suitability

Obviously the first question one should ask is 'Will I have enough money?'. The second should be: 'What is enough?'

And the latter is exceptionally difficult to predict. On the face of it, real-value pension pots, when looked at in pounds and pence as a standalone figure, seem good. 

For example, Prudential's latest 'Class Of' research has found people retiring this year (2018) are retiring with approximately £19,900 a year - the highest average on record. 

For someone with a spouse still in paid employment, no mortgage, no more school fees to pay and no more £4,000-plus travel costs to commute to work, this could go a long way.

For those actively withdrawing income, a revised cashflow plan at each meeting is the best way to help clients remain on track. Fiona Tait

Of course, the stretchability of this money throughout retirement depends on investment performance, lifestyle changes (think of the increase in numbers of 'silver splitters' getting divorced in their late 50s and 60s) and rising longevity. 

Given this, it is perhaps unsurprising the research also showed only 50 per cent of the 9,896 people surveyed by Research Plus on behalf of Prudential felt that £19,900 would be enough.

Furthermore, just less than one-third, 27 per cent, believed they would not have enough money for retirement. 

The table, below, shows the difference a decade makes in terms of expected retirement income.

Source: Prudential

Commenting on the results, Vince Smith-Hughes hails the "good news that there is a record high for expected retirement incomes", given the figure was a 10 per cent rise on 2017.

However, he adds: "The uncertainty is affecting the confidence of nearly half of the Class of 2018, who fear they are not financially well-equipped."

So how can they feel more secure - and how can advisers help people make sure their funds are sustainable and suitable to their needs, both at the point of retirement and throughout their pensionhood? 

After all, people's situations do change, and what might have seemed a suitable drawdown strategy at 55 might be completely unsuitable by age 65.

Suitability

Questions of suitability are pertinent to those taking out a lump sum and investing in property or cash or buying expensive rare-breed sheep - and especially to those entering drawdown.

One might expect someone blowing their pot on a villa in the Costa del Sol and a mistress in the Azores to run out of money in retirement.

However, people who have chosen drawdown because of the control and the flexibility and the potential for continued investment returns could be forgiven for thinking their money will last longer.

According to Rachel Smith, associate consultant for Mattioli Woods, the way to assess ongoing suitability is regularity of reviews.

She explains: "Clients receiving an income [from drawdown] should receive ongoing suitability and sustainability reviews of their pension fund to ensure the income is appropriate and manageable."

She says such reviews should consider factors such as: 

• Underlying pension assets.
• The income the assets generate.
• The client's individual circumstances.

For example, reviews she would carry out with clients would be "bespoke" on a yearly basis, and discuss such things as the income from the pension and other sources, the client's age, health and any external factors that might have changed their objectives for the fund over the past 12 months.

This could include anything, she says, from "an investment maturity other than pensions, or upcoming home improvements".

She continues: "Once an adviser has fully understood the needs of the individual, then the review can include worthwhile advice on ongoing suitability, including projected income figures and the number of years the fund can - at current [withdrawal] levels - be sustained."

Jeff Steedman, head of self-invested personal pensions and small, self-administered business development at Xafinity, agrees with the need to carry out regular reviews, and at any age.

"Financial advisers can add a huge amount of value to clients at whatever age, whether 55 right through to 80 and over.

"Pension pots, whether defined benefit or defined contribution or personal pension, need to be reviewed regularly to ensure the investment risk matches the client's needs and aspirations."

Annual reviews should be carried out with the support of a financial adviser who can also help reduce future inheritance tax. Jeff Steedman

Fiona Tait, technical director for Intelligent Pensions, believes regular reviews are essential to enable "remedial action to be taken before any discrepancies result in too large an impact".

For Ms Tait, a cashflow plan is a vital part of the adviser's toolkit. She explains: "For those actively withdrawing income, a revised cashflow plan at each meeting is the best way to help clients remain on track.

"It helps them consider whether the advantages of drawdown still outweigh the alternatives for this particular portion of the client's overall portfolio of assets."

Tackling tax

Taxation is one of the biggest bugbears for everyone working in financial services - so it is hardly surprising that the majority of Britons find understanding their tax situation frustrating, time-consuming or even too difficult to tackle at all.

Mr Steedman says this is where advisers can really help add value, to make sure any ongoing suitability reviews take tax into consideration, and explain it in simple terms to clients.

He comments: "Tax planning, including understanding when the state pension will start for the client, as well as their short-, medium- and long-term income needs, must all be managed within the ever-changing tax bands. 

"At the least, annual reviews should be carried out with the support of a financial adviser who can also help reduce future inheritance tax."

simoney.kyriakou@ft.com