Now we are into the third year of pension freedom, writes Billy Burrows, the time is right to revisit how we communicate the benefits and options of the not-so-new regime to ensure clients receive the best outcomes.
In the immediate aftermath of pension freedom, the focus was understandably on the shift away from the straitjacket of annuities to the flexibility of taking cash lump sums or investing in drawdown. This has happened at such a speed that many advisers and their clients may now behind the curve when it comes to finding the best drawdown solution.
This begs the question, ‘Are we doing enough to ensure people are obtaining the best solution?’ If we are to avoid the pitfalls of the previous annuity-focused regime, we must ensure the mistakes of the past are not repeated.
In my analysis, one of the biggest mistake of the past was that the industry became so obsessed with the shopping analogy that many people ended up shopping for the highest annuity without realising they had other options. I agree not enough people shopped around and lost out, but how many more people are locked into low-paying annuities without any flexibility because they did not realise they had other options?
It could be argued the reverse is true for drawdown – people are so wrapped up with the flexibility of drawdown they are not shopping around for the best deal. With annuities, the best deal was easy to find because it is right-driven but how do people know what the best deal for drawdown is?
With any investment option, the best solution is not necessarily down to price or features but to the quality and suitability of investments. Drawdown is no exception and this means advisers must go the extra mile to make sure the investment strategies they recommend for drawdown are aligned with their client’s objectives.
As someone who both advises clients and writes guides on retirement income planning I am faced with the challenge of practicing what I preach.
In my recent guide The Retirement Journey – Questions and Answers, sponsored by Prudential, I write about the importance of recognising that investing for drawdown is very different to investing before retirement, as well as on the dangers of sequence returns risk. So how do I incorporate my own ‘words of wisdom’ into my advice process?
I have looked at many different investment solutions and techniques for managing sequence of returns risks and, while there is no single right answer, there is general agreement it is important to build sufficiently diversified portfolios that match the client’s risk profile and to make sure there is a strategy for taking income.
Let’s not forget costs
Finally, we should not forget costs. When income is being taken from a drawdown plan, costs matter because, the higher the costs and fees, the less potential income that can paid. I used to think higher charges for SIPPs and drawdown did not really matter because it only took a small amount of extra investment growth to more than make up for extra costs but I now I think differently.
This can be explained by looking at the 4% rule – yes, I know there is a lot of debate here but I will leave that to another time – where the income is taken is 4% of the value of the fund each year. It follows that 4% of a fund with lower charges will be higher than 4% of a fund with higher charges if the investment charges were identical.
In conclusion, drawdown is an investment solution so identifying the best solution involves looking at several different issues including investment portfolios, income strategies and cost.
At the end of the day, the difference between a good and bad client outcome may be less to do with product solution and more to do with the quality of advice – but it certainly helps if the best product solution is chosen.
William Burrows runs Retirement IQ and is an adviser at Better Retirement. You can follow the latest annuity trends and see a range of annuity charts at www.retirement-iq.co.uk
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