At the moment, market conditions are relatively benign and we have not experienced the same volatility we saw during the financial crisis. However, we do not know what could happen in the future. Historically, during times when we see equity markets fall, people in drawdown have had to struggle to weather the storm. However, if you have a secure income you are better placed to be able ride it out. Markets can fall off a cliff and it does not really matter. That level of security is invaluable to many people.
However, for a lot of them, they do not want to sacrifice the freedom of drawdown altogether and that is where the Retirement Account comes in.
Q: What other opportunities might there be for clients transferring out of their original pension scheme?
A: Another attraction of opting to transfer a pension is the client may be able to restructure the benefits associated with the pension scheme. A good example of this could be changing the death benefits, perhaps structuring it so the capital value goes back to the family. Alternatively, someone who is single or divorced may want to forego the spousal benefit present in their current scheme. For a lot of people, ensuring the maximum amount is passed on to their dependents is a key priority.
By getting good financial advice, clients can reassess which benefits are important to them and what their ultimate aim is and restructure their scheme around this.
Q: You have spoken about the importance of covering financial commitments with the annuity component. How should advisers look to structure the drawdown element of the product?
A: There are actually a number of ways advisers can organise the drawdown plan. There is obviously the issue of working out the withdrawal rate and whether to opt, for example, simply to cancel the units each month or, alternatively, to take two-years’ of income in cash in order to ride out any volatility. There is also the need to structure the income drawdown portfolio in the optimum way to maximise returns while minimising risk.
Research we have conducted shows that the majority (94 per cent) of respondents often recommended medium-risk funds, with a further 74 per cent also opting for low-risk funds. This seemed to bridge the gap between the ultra-cautious guaranteed funds and higher risk options.
The overall message is that there are lots of ways of organising the drawdown component and advisers are encouraged to consider what might work better in different situations in order to achieve the best outcomes. There is a solution out there for everyone, but advisers cannot take a one-size-fits-all approach.
It is also important to note that clients’ circumstances change over time so it is important to regularly review their portfolios. In our survey, 82 per cent reviewed their clients’ accounts annually and I think this is a good benchmark to ensure the portfolios remain suitable for their requirements.
