Despite the freedom provided by Pension Reforms, it is still true to say that everyone has core expenditure needs that they need to meet which becomes their personal minimum income requirement.
Making sure essential bills are covered can be so important and payment should be met by some kind of guaranteed income whether from the state, defined benefit pensions, or other means such as a guaranteed income for life plan.
Since April, annuities may no longer be mandatory but it’s true to say that they remain the only way to secure a guaranteed income for your client’s life and, as long as the right benefits are advised upon, can protect their spouse’s life too should your client die first.
Drawdown also remains a popular way for newly retiring private investors to take their pension income although it does not provide any guaranteed income to support these minimum income requirements and can be susceptible to the high and lows of markets and interest rates. A blend of the two can of course provide security alongside the potential for rising income and flexibility over time. Income drawdown may suit those pension savers who have already secured their essential income levels via another means. In many cases, this ‘mix and match’ or ‘blended’ solution of part guaranteed income for life plan and part drawdown can work well where the client has some capacity for loss and appetite to take investment risk.
If there is a shortfall of guaranteed income, after customers have taken their tax-free cash, a guaranteed income for life plan can bridge the gap and meet the client’s requirements for capacity of loss .
In spite of the recent negative publicity, guaranteed income for life plans seem to remain good value (a point confirmed by the FCA in their recent occasional paper) when shopping around for the best rate and taking health and lifestyle into account. The remainder of the pot can be placed into income drawdown where the money remains invested and income taken when needed to support any income required in excess of their personal minimum income requirement.
In later retirement years, where clients tend to have a lower attitude to risk due to the time required to recover from any early dips in the value of their investments however during the accumulation period, clients have more time on their side to plan for their retirement compared to during the decumulation stage when time may be a precious commodity if their investments have taken a fall in value. This sequence of returns can have a devastating impact on their pension fund.
The timing and sequence of returns on investments will be a key issue which needs your advice expertise. It is because of the possible effects of the sequence of returns that clients require sufficient capacity for loss to go into drawdown. As these two example show. A good sequence of returns leads to a good outcome, but a poor sequence of returns can be catastrophic.
There are a plethora of tools now available which can help your clients to establish which solution is best for them and with your guidance and advice can easily identify how much income they need to meet the essentials whilst taking into account other guaranteed income such as state pension, when payable.
Please visit our tools section within the Panacea Pension Reform site at http://www.panaceaadviser.com/main/p169/Tools.htm or why not ask any of the provider sponsors to demonstrate their range of tools ?