PensionsFeb 18 2021

Blending pensions can be expensive

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Scottish Widows
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Scottish Widows
Blending pensions can be expensive
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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.

Questioning of the client to achieve the parameters of their requirements is key to defining any divisions between annuity purchase and drawdown keith Churchouse, Chapters Financial

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.”

Packaged solutions

The range of options available to advisers includes some products which combine guarantee and flexibility, but they don’t come cheaply, as Drewberry’s head of paraplanning, Jonathan Cooper explains: “'Third way' products blend annuities and drawdown into one convenient package. However, charges tend to be high and opportunities for returns limited. 

“Fortunately, modern technology, such as platforms allows advisers to mimic these products for their clients via standalone arrangements. This can achieve the same benefits, but with increased returns potential, control and flexibility.”

Ross Leckridge, associate director at Johnston Carmichael Wealth takes a similar view: “There are products blending annuities and drawdown into one package and generally they are suitable for those clients who wish to keep their affairs simple or are unsure how their expenditure might go in retirement. Our preference is to create a solution for clients that would use both annuities and drawdown to create income for clients in the most tax-efficient way possible, catering for income for life and allowing clients to live life on your terms.

Fiona Tait, technical director at Independent Pensions agrees that packaged solutions may not be the most cost-effective option: “In general, we believe that using separately sourced annuity and drawdown products is likely to provide better value for money for advised clients than packaged products which tend to come with higher charges.

“It also means that successive annuities can be secured on different bases as the clients’ circumstances change, with level annuities providing good value in the early years and inflation-proofing being provided by the drawdown fund, potentially followed by escalating annuities in later years.

She adds: “There is also a relatively new product from Just Group which holds the annuity within the overall Sipp plan to provide an income underpin but where withdrawals can be varied according to the client’s needs at the time.”

Retirement income products and services business, Just Group, launched its new product, Secure Lifetime Income last year, on a pilot basis.

The company’s group communications director, Stephen Lowe, emphasises the importance of the adviser’s input, in helping clients achieve their pension objectives, as he says: “Advisers have always been the client’s architect; they mix and match the assets and sources of income to deliver what the client needs and wants.  

“Over the last decade or so advisers have moved where they do business and the environment is now dominated by platform technology.  This adoption has accelerated in the last five years as the pension freedoms reforms were introduced.  We developed our solution, Secure Lifetime Income (SLI), in response to these trends.”

Fiona Nicolson is a freelance journalist