Why a client in drawdown may want to transfer

  • Describe some of the factors affecting clients in drawdown
  • Identify reasons why a client may want to transfer
  • Explain some fears about drawdown
Why a client in drawdown may want to transfer

The COVID-19 pandemic has and continues to bring many challenges to financial advisers and their clients.

Initially, concerns concentrated on volatile investment markets and their impact on clients’ financial planning.

Longer term, further issues are expected following the end of the Coronavirus Job Retention Scheme and furloughing in October. This will likely bring increases in unemployment and falls in people’s disposable incomes as taxes rise to pay for the cost of dealing with the pandemic.

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In these unsettling times clients are increasingly re-visiting their plans. Many may have chosen to delay retirement due to no longer having sufficient funds or be concerned about the sustainability of their income.

Others may be looking to tap into their pension and drawdown plans to help them make ends meet in the short term.

It is clear there is a strong demand for financial advice as people look to maximise their retirement income and this is evident in the sharp increase in adviser usage of our tools and reports which model income sustainability. 

We have also seen the number of transfers or switches from one drawdown provider to another increase. This process is called ‘transfer in drawdown’.

This trend is partly driven by growth in the overall number of drawdown policies following Pensions Freedom regulation in 2015 but other factors are also at play which we will discuss in more detail. 

Plan suitability

The customer request to first take income from their drawdown plan triggers the adviser to consider whether the current provider remains the most suitable as taking income fundamentally changes how the plan is being used. 

For instance, many clients will have previously taken their tax-free cash (at say age 55) and later on (at say age 60) want to start taking an income. 

Their chosen investment strategy may have been appropriate while the customer is in accumulation, but does it remain appropriate when they start decumulating?

While some drawdown providers offer investment strategies targeted for the decumulation stage, there are others who do not and the client risks finding themselves in a plan or investment strategy that does not meet their current needs.

An adviser can look at whether their current plan and investment strategy remains suitable and make any necessary changes. 

Income sustainability

The suitability review referred to above also provides the opportunity to review whether the level of income the client wishes to take is actually sustainable over the long term. The biggest fear for drawdown clients is running out of money in retirement. 

While some would be able to plug the gap by returning to work for a period of time for instance, for others that is not feasible.

So it is important to have a conversation about what the client expects from their retirement income, what other assets they could fall back on and whether their expectations match up to reality.