Blending pensions can be expensive

This article is part of
Guide to retirement income

Blending pensions can be expensive
Pexels/Skylar Kang

The various factors affecting annuity rates and the potential concerns about the impact of market fluctuations on drawdown raises questions around clients’ pensions requirements.

This can include areas such as what options they have to meet their needs, what products are available to enable them benefit from the advantages of both annuities and drawdown, as appropriate.

So, how should advisers approach this? 

Firstly, it is important to get a clear picture of the client’s needs, as Keith Churchouse, chartered financial planner and director at Chapters Financial says: “Questioning of the client to achieve the parameters of their requirements is key to defining any divisions between annuity purchase and drawdown.” 

Jessica List, pension technical manager at Curtis Banks says: “For many people the best solution may be to have a mix of guaranteed income and funds in drawdown. Normally this would be achieved by simply allocating pension funds to different purposes. Someone with multiple defined contribution pensions might consider using some to buy an annuity and putting others into drawdown; however, it’s also possible to split a single pension between different uses.

“It’s also important to remember that it’s possible to purchase an annuity from funds that are already in drawdown. Therefore, someone who wants more flexible income early in their retirement can still use their remaining funds to create a guaranteed source of income later on.”

Henry Tapper, chief executive at AgeWage says: “The simple answer is for people to see retirement income holistically and see the state pension as their guarantee (supplemented by guaranteed income from defined benefit occupational schemes). Income from drawdown is the ‘cream on the top’.

“But as people become more reliant on their pension pot (as opposed to a wage for life), the need for greater certainty from drawdown may lead to new products arriving.”

A wide choice of options

In the meantime, advisers already have a wide choice of options at their fingertips, as Alistair McQueen, head of savings and retirement at Aviva points out:

“The pension freedoms and current range of retirement options allow customers to mix and match their retirement needs like never before.

"Full withdrawals, drawdowns, uncrystallised funds pension lump sums (UFPLS) and annuities are available to customers, and all are being used. This wide range of options plays to the wide range of individual needs in retirement.

“Current practice advocates the mixed use of the current range of retirement options, in their existing states − for example, the use of some full withdrawal, some drawdown and some annuity.

And McQueen believes that this gives advisers the opportunity to demonstrate their expertise, as he comments: “This mixing plays to the strengths of the financial-advice community. Their expertise and skill, coupled with their adoption of technology and modelling, can help to secure an optimum outcome for the thousands who are entering retirement each year.”