In recent years self-invested personal pensions (Sipps) have grown in popularity, with numbers edging towards the one million milestone. Their suitability has broadened as different Sipp products have come to market offering individuals a choice of investment opportunities, service propositions and fee structures.
While investment flexibility and choice in building a nest egg is a key advantage of the Sipp, it should not be forgotten that the primary aim of a pension plan is to provide an income in retirement. As the growing number of Sipp holders move from the accumulation phase to the decumulation stage of their retirement planning, there will undoubtedly be an impact on the at- or in-retirement market.
Keeping control
When you consider the two main methods of drawing income from a defined-contribution pension pot – lifetime annuity purchase and income drawdown – you might expect Sipp clients to have a natural affinity with drawdown. Having taken an active interest in the investment of their fund, it allows them to retain control over their investment rather than relinquishing it to an annuity provider.
But it should be recognised that the investment objectives will change. In the accumulation phase it is about building up as big a pot as possible, taking account of attitude to risk and the term to a target retirement date. Conventional wisdom is that over longer terms, exposure to higher risk and more volatile funds – particularly while making regular contributions – can be beneficial due to the mechanism of pound-cost averaging.
Once income starts to be taken via drawdown, the investment focus needs to change. Although a client entering drawdown at age 60 may be invested for at least a further 20 years – ie long term – the reality is that this is broken down into short-term tranches of three years, to tie in with the drawdown reviews up to age 75, and thereafter into one-year terms.
Clearly, if drawdown does become the retirement income vehicle of choice for Sipp clients, there will be an increased need for pension providers, financial advisers and wealth managers to facilitate the changing investment objectives. But there is a lot more to consider with drawdown than just the investment of the fund.
Weighing it up
Before taking a retirement income, all the options should be compared in an assessment of risks and benefits. Where an annuity purchase is rejected in favour of drawdown at outset, there should be an ongoing review to check whether an annuity purchase or other income options become more suitable later on.
It should also be remembered that the maximum Gad (Government Actuary’s Department) drawdown calculation is just that: a maximum. While there may be a need or temptation to take the maximum, this should be considered against a backdrop of what is both a sensible and, more importantly, sustainable level of income to draw based on likely investment returns. Of course, the job is made harder by other factors such as changing drawdown rules, a fluctuating gilt rate and even the influence of the EU – for example, the European Court of Justice’s ruling on gender neutrality. The health and life expectancy of the retired member will also be an important factor.
