by John Westwood features@algarveresident.com
John Westwood is the Managing Director of Blacktower Financial Management Group.
The last decade has seen income drawdown become the darling of the retirement income market.
Why? Because it offers everything that traditional annuities could not – income flexibility, death benefits and access to a range of funds that give income growth potential – all with the same tax-free lump sum benefits of the annuity.
There’s no doubt that it has served a real need in this market. But does it really meet the needs of all retirees? Would you have been better off buying an annuity? What happens when you come to exit drawdown? And given recent market conditions, has it left you exposed?
The reasons for drawdown’s success still stand. Clients have different income needs in an ever-longer retirement, and those needs are impossible to predict.
Having the ability to take a flexible income is essential in order to meet those needs. Positioning yourself for an income that keeps pace with inflation is increasingly crucial, and clients still balk at the thought of losing all of their pension savings on death to an insurance company.
But what are you giving up by not annuitising? Two things – guaranteed income for life and mortality cross subsidy.
What’s amazing is that research continues to show that the one thing clients are hungry for are income guarantees – particularly in retirement, and especially the further into retirement they are. Mortality cross subsidy is often overlooked but the value to the customer over time is huge – potentially up to 10% over 15 years.
Mix and match
In finding a balanced solution, many clients have found themselves splitting their pension funds between a drawdown product and a conventional annuity.
Until now, they have been forced into this ‘mix and match’ approach because there has not been an affordable product that ticks all of the boxes.
For some clients, that strategy has worked very well. However, there comes a point when it’s possibly better to exit drawdown, because it is leaving you slightly too exposed as you grow older.
Possibly these clients want to continue to be invested in the stock market and take an element of risk, but want some sort of guarantee to boot.
And what about clients with a fund size that precludes them from utilising drawdown? It’s not that they don’t have a decent pension fund, but not enough to take the risks associated with drawdown.
Arguably a level annuity is taking as much risk – locking into a fixed level of income for what could be 20 to 30 years has all sorts of implications, such as a falling income in real terms.
You may be able to increase your income by purchasing an enhanced annuity, should you be unfortunate enough to have a qualifying medical condition.
While this gains a higher income than with a conventional standard annuity, it still remains a fixed level income for life with no flexibility unless an increasing annuity is bought.
These tend to be expensive with low income in the early years.
Forecasts for annuity rates are downwards with some commentators saying this could be by as much as 20%.
Increased options
So what is the answer? The good news is that innovation in the retirement income market is such that a polarised approach to retirement financial planning is becoming old fashioned.
There are options out there for you that offer holistic solutions that can flex and adapt through the life of your retirement and take into consideration health conditions.
The investment-backed annuity is not a new concept, but existing products have often been perceived as complicated, opaque and expensive.
Recent innovations have meant that there are products out there that can demonstrate the opposite.
Drawdown, whether in a UK SIPP or QROPS, absolutely has its place in the retirement income portfolios of many clients, but it cannot be all things to all people.
For many, there are now affordable, flexible, transparent alternatives with lifetime guarantees that are designed for the everyday person entering retirement.
As Regulated Chartered Financial Planners, we at Blacktower Financial Management are highly proficient in all aspects of pension advice whether it is a Final Salary Pension Transfer Analysis or recommending a QROPS Transfer. It is also imperative that all aspects of Pension Income planning are reviewed before decisions are made.
Blacktower Financial Management Group – Telephone 289 355 685.
