What are the Retirement Income options now?
What are the pros and cons of the different Retirement Income options?
- Do nothing and defer.
- Take triviality. Post April 2015, take all as cash irrespective of £30,000 limit less marginal rate tax after 25% tax-free lump sum.
- Purchase a lifetime annuity, fixed term annuity or investment annuity utilising the open market option (OMO).
- Move to a drawdown contract, phased or in full.
- Utilise one of the new innovative products that allows access to all of the above in various portions under one wrapper.
- All of the above in isolation and at different levels to provide the best outcome for the individual concerned.
- Draw your income from the ceding scheme whether that be defined benefit (DB), defined contribution (DC) trust based or GPP.
- Transfer from DB scheme to an immediate vesting personal pension or drawdown account.
I have attached a document with the pros and cons of annuity verses drawdown, a similar one will be produced around the new innovative products once we have more details.
Who should consider the different Retirement Income options?
In brief, those with a lower attitude to risk and low capacity for loss should still look for the guaranteed income as they cannot sustain any fluctuations and therefore an annuity will still be their best course of retirement income. Those with larger overall benefits may decide to guarantee some income yet continue to invest a proportion to make use of the flexibility that comes with such products as a drawdown accounts. The retirees in the middle, may want a bit of everything and will make the most of the new flexible and innovative products that will inevitably come to market next year post April.
How do I make sure I secure the best retirement income for my client?
Provide education for the member from say age 50 to aid them make an informed choice and give them access to impartial advice from a Financial Planner specialising in “At Retirement” work.
What if retirement income options change again in the future?
A good Financial Planner will complete a financial review obtaining all the relevant information to understand the client’s aspirations and current requirements. Decisions will be made based on what we know today, however as products become more flexible they allow us to change direction in the future should we deem appropriate. Also, some will require a guaranteed income for the rest of their lives and with that guarantee comes future inflexibility; therefore any future changes may not be accessible. The Government do however consider this and try to provide periods of transition from one regime to another.
What kind of new retirement income options can we expect to see in the future?
We are working closely with all the providers in this market and are seeing innovative products being shaped, these include the following:
- 12 month annuity fixed term products with guaranteed capital returns.
- Wrapped contracts that include a cash account, investment annuity and drawdown account all in one with one annual valuation and one review to keep the product as cost-effective as possible for the retiree.
- More cost-effective SIPPs utilising the drawdown rules, administered mainly via technology to again keep the costs to a minimum to allow them to be effective for even the smallest of pension funds.
- Annuities with cash in options and return of capital on death.
- New deferred annuities covering longevity risk and the fact we feel annuity purchase may start to be pushed back a decade to age 75
What part should an annuity now play in delivery of retirement income?
The annuity (if still called that) will provide those with a low attitude to investment risk with a guaranteed income for life, it will also form part of the overall answer for many covering set monthly outgoings with the balance being invested potentially for more flexibility and better death benefits. It is one of the only products that will help against the three risks of longevity, investment and inflation.
Should people make a one-off retirement income decision or stagger their choices?
This will be very dependent on their needs and aspirations, many will not have the luxury of staggering their choices as they will need the income with immediate effect. Others who can sit back and contemplate their choices should wait to see what new innovative products are produced by the providers that may suit them more than the current ones. You may also get some that are in a half-way house situation that need some money now, i.e. tax-free cash but can defer taking any income, they can make use of the new 12 month products or a drawdown contract with nil income if more appropriate.
How often should retirement income options be reviewed now?
- If a drawdown contract, at least yearly if not six monthly for those drawing large incomes!
- If a fixed term annuity, it will need reviewing at the end of the term.
- Many will have deferred their decision until next April when I am sure there will be a glut of retirees requiring not only the new Guidance guarantee but good impartial financial advice.
How should an adviser change the way they operate given the new retirement income landscape?
They will need to become more adept with providing earlier educational assistance to their clients so that when the time comes they are in a better informed position. Continuously developing their own knowledge of the new innovative products available on the market and obtaining feedback from their clients to the suitability of the service they provide. The use of technology and streamlined administration systems will allow them to be more competitive in their charging structures and still help those with small fund values.