PRESENTER: Drawdown offers the potential to increase retirement income through investment growth, and gives the flexibility to choose the right investment strategy for taking income. In this Akademia module, we’ll look closer at this issue with Aston Goodey, Sales and Marketing Director of Retirement Advantage; Richard Nuttall, Head of Compliance at SimplyBiz; and Andrew Tulley, Pensions Technical Director for Retirement Advantage. So let’s take a look at what we’re going to be covering over the course of this module: defined drawdown post pension freedoms and its opportunities and challenges; we’ll explain longevity risks, sequence of returns and mortality drag; and how to develop a robust centralised retirement proposition. Well I began by asking Aston how have things changed in the drawdown market since pensions freedom?
ASTON GOODEY: Lots and lots. So what we had was a market that was dominated previously by annuity business. So clients came up to maturity with said company, whether it was Prudential, Aviva, L&G, whoever it might have been, and they would typically buy the annuity from the company that they’d saved with for however many years previously. Or for those who were often going through advisers, the adviser would then search the whole of market and select the best annuity provider and the best rate for that client. And that’s where most business went. What we’ve seen post pension freedoms - and in fact that was about 90%, 90% went to annuities - post pension freedoms we’ve seen a huge swathe where the vast majority now goes into drawdown. I think there’s about twice as many drawdown cases are written instead of annuities. And that’s good in some respects, but it carries some risk with it.
So it’s great that people are now using freedom and choice as it was intended. So actually what we are finding about a million DC schemes, defined contribution schemes, have been accessed since pension freedoms, and about 53% of those have taken the whole fund out. So these are people that have got a fund, they’ve moved it and used it for whatever they’ve seen fit to use it for. The good news is that tends to be, 90% of those cases were for £30,000 and under. So what we’re not seeing is, you know, not that I don’t think anyone ever thought this, but people buying Lamborghinis, I don’t think people are doing that. So we’re tending to see the big funds stay in drawdown and be managed accordingly. But it’s the smaller funds where people are actually stripping them out and taking the money.
PRESENTER: Well innovation in products in this space, it has been limited, but has this sparked a renewed innovation for products?
ASTON GOODEY: Yes, there’s been limited innovation I think would be fair to say; in fact probably we’re one of the few companies that have come out with anything different. And actually all that we’ve done is we’ve taken, so traditionally annuity and drawdown, and hey presto we’ve created it in one contract. So what you now have is an income drawdown plan with an annuity that’s housed within it. Now the benefit of that is you can secure a guaranteed income for life in that element, and the balance you can put into drawdown, and it can remain invested in the markets as people pick and choose to do, or as the advisers see fit to select the fund for their client. Again, there’s probably been some innovation there in terms of funds. So people are doing more cautious funds or adding protected funds. So there’s more innovation on the investment side of things, but actually product side has been very limited.
PRESENTER: So let’s look at challenges and opportunities that pension freedoms has created in the drawdown sector.
ASTON GOODEY: The opportunities are vast really, particularly for asset managers, because actually like I said the majority of money is now going into drawdown, and there’s a real key role for advisers here, so I think there’s huge opportunities for advisers in this market. Historically they would recommend the best rate in the market, and that would be with company X. They don’t really need to see that client again, because actually that’s a guaranteed income for life. There’s nothing changes on that product, that’s it; whereas actually a drawdown needs to be closely managed, and a lot of advisers might review twice a year, certainly at least annually. So there’s huge opportunities there for an engagement with a client right up until death and beyond, because there’s obviously spousal benefits and so on and so forth, so I think it’s changed the relationship for advisers with elderly clients that perhaps wasn’t there so prolifically in the past.
PRESENTER: So, can we just touch more on the challenges though? So they’re the opportunities, but there must be also major challenges the industry faces in this.
ASTON GOODEY: Yes, I think there’s some really big challenges for us, and for the advisory community, that is one of, so before, the good thing is about annuities is they’re secure, guaranteed incomes for life, that’s it. Whereas now what you’ve got is lots and lots and lots of money is coming into income drawdown, and that money is normally invested in managed funds, there’s cautious through to adventurous, but actually those funds tend to fluctuate with market conditions depending on what they’re invested in. So actually you’ve now got customers exposed to market risk that they wouldn’t have been historically, and actually there’s a key role there for us in terms of creating the right products and managing the risks within those products. There’s a key role for advisers as well in terms of managing the right portfolios so that clients don’t get outcomes that they’re not expecting, or outcomes that they’re comfortable with, and understand that, you know.
Since pension freedoms the markets have gone up and up and up and up. So of course a lot of people have moved into drawdown, and actually they’ve seen their reviews or they’ve seen their online statements or annual statements that come through and go this is great, it’s gone up 10%, it’s gone up 10% again, wonderful! But at some point there’s probably reasonable, it’s reasonable to think that there might be a market correction at some point. Whether that’s this year, next year or whenever, who knows. But actually it’s then what happens to those clients when they see that correction: what’s their behaviour and how do we manage that? And that’s the bit that I think we just need to be very careful with. Because actually for once you’ve now got a product that actually your income could actually run out before you’re actually deceased. Whereas actually the thing with an annuity, you’ve had that income guaranteed for life so you know you’re always going to get it no matter what the markets do.
PRESENTER: Yes, absolutely. Well Richard, Aston mentioned people aren’t going out and buying Lamborghinis off the back of the pension freedoms, but mistakes in retirement can be extremely costly. What sort of things can go wrong, what should people really be aware of would you say?
RICHARD NUTTALL: Well Aston was talking about choice before, and I think choice is a fantastic thing for any individual. I mean in the past people didn’t have that choice, that’s why they took out an annuity often with the same provider. One of the things it did do was provide a guaranteed income for the rest of their lives. What we’re seeing now is people having that flexibility and that default option does seem to be drawdown. Now with that there comes a great deal of opportunities but also risk as well. I mean let’s not forget prior to pension freedoms there was a minimum perceived level of money that went into drawdown, and that’s gone through the onset of pension freedoms. What we’re also asking people to do is to make a retirement decision when they’re not experienced in this particular market.
Now, if they’re lucky enough to be able to see an adviser, we do have some issues in terms of capacity in the advice market at the moment in time. If they see an adviser I think their needs will be catered for. My concern is those people that don’t get to see an adviser. They’re not having that level of experience and knowledge within the financial markets. They’ve not gone through a programme of obtaining qualifications to put them at that same level, or be signed off as someone competent in that particular area; they’re making huge lifestyle decisions really on the back of some meaningless risk warnings potentially. So as a market I think we need to think how we educate clients to this particular fact.
ASTON GOODEY: Yes, and I think it’s worth noting that before pension freedoms 5% of the drawdown market was non-advised; it’s now up to 30%, and that’s a growing number.
RICHARD NUTTALL: And when you put that into actual numbers itself, that’s a staggering amount of people. And that carries huge risk to those individuals. I think where advisers are concerned, I think there are risks, but I do believe the opportunities certainly outweigh that. I think one of the biggest risks is where an adviser will advise on drawdown, but there’s no ongoing relationship. I think first of all there needs to be that ongoing relationship for both parties concerned. And I think what’s really important here, just to really build on what Robert was saying is this income for life, the sustainability of the drawdown fund, you know, because it can be susceptible to market conditions, which can have real negative impact upon potential retirement lifestyles.
Now, you could go to the other extreme as well that sometimes you don’t actually need a pension to provide an income. So an opportunity for an adviser can go beyond that to look at perhaps succession planning for the next generation. That’s looking at different angles again, but the opportunities are there, and I think it’s an opportunity we never had prior to freedoms. So I think it’s exciting times, but we need to tread very carefully.
ASTON GOODEY: The other one that’s worth mentioning is defined benefit schemes. So again these were the Holy Grail of pension schemes, so great. You work for a company, you came up to retirement and you’ve got two thirds of your final salary or whatever the scheme rules were written on. They’re worth their weight in gold, these are fabulous schemes, and they give you a secure guaranteed income for life at that point. Now again what’s happening at the moment, now the good thing is you have to take advice to be able to transfer these schemes away, but lots and lots and lots of people are now coming out of these DB schemes and buying, or going into drawdown where actually the risk is all on the individual, so there’s investment risk and there’s mortality risk. So the beauty of an annuity is you get this thing called mortality cross-subsidy, so the pooling of risk. So those that die early subsidise those that live longer.
Now, if you hadn’t been in an annuity at aged 75 to 80 the extra return that you need from your drawdown is about 7% if you’re in perfectly good health. If you’re in mild health the return you would need is 10%, and moderate health you’d need an extra 13% from your drawdown to keep pace with the annuity between that age period. So you’re bearing the longevity risk and you’re bearing the investment risk, which can be significant. So again we just need to be very careful when we’re taking people out of these guaranteed secure incomes for life and then managing that risk through a portfolio of investments.
RICHARD NUTTALL: I think you’re exactly right there. I think that this was one of the issues when we look at risk that people do tend to focus on the underlying portfolio, as opposed to the actual risk that someone is actually willing to give up something guaranteed for the rest of their life, to put in something which isn’t guaranteed. You know, that’s another risk question that’s often forgotten that whole transfer discussion.
PRESENTER: And conventional wisdom obviously says that we should de-risk with age. This is certainly the case you think?
ASTON GOODEY: Yes, absolutely, historically again you have to be careful with some of these, a lot of pension schemes, corporate pension schemes had default funds which were lifestyle funds, which basically migrated your asset mix if you like to more cautious funds on the assumption that age 60 or 65, whenever it was, that you then moved into an annuity. So you’re de-risking to buy the annuity, and actually there’s still lots of those funds round. But of course what happens now is actually I’m not retiring at 60, I’m now at retiring at 62, 63, 70, whatever it might be, and actually those funds don’t work so well. So actually you don’t want someone to be purely in gilts at aged 60 if they’re going to go on to live for another 10 years or work for another 10 years, and they want to remain invested in the markets.
So that needs to be considered when again advisers are reviewing portfolios: are they in the right products to meet their needs, and what are their needs? So when am I going to retire, and am I going to retire? Again a lot of people don’t retire at 60. They might go into part-time work and so on and so forth. But we’re definitely seeing people work longer than they used to.
PRESENTER: And this is where longevity risk then fits into this area.
ASTON GOODEY: Absolutely yes, and that’s the problem. And again if people are in drawdown and they’re taking what could be reasonable levels of income. So someone might think well it’s reasonable to take, in fact there was always a 4% rule. If you could take 4% and you should be able to maintain that for life. Whether it’s 4%, whether it’s 5%, whether it’s 6%, whether it’s 2%, whatever, it doesn’t matter, but whatever level of income you’re taking is subject to you getting returns on your money. Now if you’re not getting the returns and you’re still taking a level of income, all the time your fund is winding down. And actually there is a real risk that you could be 80 in perfectly good health, and suddenly you haven’t got any money left because your pot’s expired. And again there’s such an important role for advisers to manage that money.
So that’s the key is to make sure that it does last a lifetime. And again going back to that swathe of people that are taking non-advised, these people managing their own portfolios, they just need to be really careful because I just fear that we could up, particularly if the markets do correct and there is a big fall, that actually suddenly they’re left without an income.
PRESENTER: Well this seems like a good opportunity to get a definition of longevity risk. So earlier Andrew Tulley came into the studio to explain what exactly is longevity risk?
ANDREW TULLEY: Longevity risk is simply the fact that people don’t know how long they’re going to live. And when you’re trying to take an income through retirement that creates a great deal of uncertainty, so it’s like a jigsaw puzzle with a key part being missing. So we know on average people are living longer, but using an average can be quite misleading. So if we take an example and look at a 65-year-old woman, we would expect on average she would live to 89, but there’s a one in four chance she could live to 96. And that uncertainty can create a great difficulty in planning, and it can mean people can run out of money. Or conversely it can mean that they take much less income than they could properly have taken.
PRESENTER: So, Richard, then considering longevity risk, as Andrew’s just described, those with income drawdown, should they de-risk or re-risk with age?
RICHARD NUTTALL: The danger is you start labelling people in different ages, and often it just depends upon basic needs and aspirations of individuals as they go through their lifetime. And one of the things that I’d always advocate is to look at cashflow. And this will go through the whole journey of a client, because everyone’s needs and circumstances are different. And the only way that you can really visualise that, and give it some meaning to a consumer, to a policyholder, someone in drawdown, is to show the effects. And I think what that will do is will show the sequence of return effects quite succinctly. But also as well that need for high levels of income throughout that whole retirement journey would be reflected in that. But ultimately it boils down to not risk, it boils down to what the capacity to bearing losses are, and typically as you get older that will only increase. So, you know, people can’t take the losses as they would do perhaps when they’re in an earlier age because of the length of time for the portfolio to recover.
ASTON GOODEY: Yes, just adding to what Richard was saying then about it would focus there very much on investments. Again historically what would happen is people, pre-freedoms if you like, would be in drawdown, and actually quite often would phase into retirement. So you would just buy chunks of annuity – which actually is quite a prudent thing to do, because again you have to remember annuity rates move up and down all the time. So actually to buy your annuity on a particular day you could be buying it when the market’s up here, or it’s down here, and actually if it’s down here you’ve locked into that rate for the rest of your life, there’s nothing you can do about that when you’re in an annuity. So actually buying it in chunks you’re getting that balance of it could be there, it could be down here, but you’re averaging when you’re buying it. And actually the older you get because of this mortality cross subsidy, the more income you get. The greater the cross-subsidy is, so actually you get a greater income as you go through. The other benefit of phasing is quite often you’ll become more impaired the older you are.
So actually buying an annuity today at 60 you might be completely healthy, so your rate will be a healthy rate. But actually if you buy it again at 65, you might have diabetes, you might have whatever it might be, whatever the condition is. So you get a rating, so you get a higher income, and then at 70 there’s something else might have happened to you, and then you get a higher income still. So actually that phasing works quite well, and it helps to keep increasing the income levels as you go through. But you’re securing, you’re locking in that element. And again this is why it’s quite nice when we’ve developed this product where you’ve got drawdown and the annuity that sits within it, because you can seamlessly drip money from the drawdown element into the annuity. And then again that’s what we’re encouraging people to do is say actually in your early years you might well want to be in drawdown, and you might want to be in equities and so on to try and gain some returns, but actually as you do get older you start moving this money into a secure guaranteed income for life underwritten at that point on your medical conditions.
RICHARD NUTTALL: The benefits of that are the flexibility within those annuity products, which were benefiting from like we haven’t seen before, and I think that’s one of the biggest off putters to annuities, the fact that they were so rigid and inflexible; whereas they can now cater to the income needs of an individual. So we can effectively turn off the income stream and keep it within that pension wrapper, which holds many benefits indeed.
ASTON GOODEY: Yes, good point, so I didn’t actually mention, so that’s right. So because the annuity is housed within the drawdown, actually you don’t have to take the annuity income as you would have done in a traditional new annuity product; you can now recycle that back into the drawdown. So if later in life you actually get an inheritance or whatever, or you don’t have that income need because your lifestyle is more sedate, you can then just put it back into the drawdown, and then you’re growing an inheritance pot potentially for whoever you want to leave it to.
PRESENTER: So then should investors increase or decrease their portfolios in growth assets such as equities with age, what would you say to that?
ASTON GOODEY: Typically people would decrease, but it depends what they want. So if they’re going to buy an annuity you might argue that they never need to decrease. The other way that you might address that is by having protected funds. So again something that we’ve seen and something that we’ve produced recently is a passive protected fund, which protects 80% of the highest net asset value. So whatever the unit price is, whatever the highest unit price is, it will protect 80% at that level. Now again you’ve got a fund there that’s multi-asset fund, and hopefully get some good returns from the equity elements and the bonds and whatever else is in it, but it does have that underpin that always say you will always get 80% of your investment back.
So again you wouldn’t necessarily want to de-risk those funds, because actually you’ve got that protected mechanism within the product itself or within the fund itself.
PRESENTER: Well this seems like a good point to go back to Andrew, so let’s go back to Andrew so he can explain volatility and sequence of returns risk.
ANDREW TULLEY: Volatility risk is simply the fact that investment markets can go up and down, and that can create great uncertainty as people move through retirement. So an investment that has a high volatility can go up significantly, and fall significantly, and it can do that on a regular basis, perhaps even day by day. And that means there’s a large range of outcomes which a customer can possibly face. So they can get a very good outcome, they can potentially get a very bad outcome, or obviously somewhere in the middle. If an investment has a low volatility then the range of outcomes is much smaller, so the customer has a much greater level of certainty about what the outcome will be, although that will probably exclude very good outcomes or very bad outcomes.
Moving on to sequence of returns risk, there’s a range of factors which are taken into account in how long a pension pot will last through retirement. Obviously how much income someone takes out is a key factor, and how regularly they take that income, as is the underlying investment return of the portfolio. But a key issue which is often overlooked is the sequence of returns. So it’s when someone gets the good returns and the bad returns, and the order in which those occur. Someone who gets bad returns in the early days that can have a devastating impact on their pension pot and it may never recover, increasing the likelihood that they will run out of money sooner than they would have expected.
PRESENTER: So, Aston, then looking at sequencing of returns risk a little closer now, and how is the best way to approach it?
ASTON GOODEY: Yes, sequence of returns is quite horrible when it comes to decumulation. So it’s your friend when you’re saying, but when you’re decumulating it’s not so great. So it’s a journey. If you’ve got a 10-year time horizon, and the first years are great and then the second years are not so great, then you reverse that and the first years are not so great, and then second years are great, the outcomes that a customer gets when you’re drawing an income is hugely different. So over that time period if you’re in accumulation, let’s say that the fund returned 30%, if you’re accumulating, it doesn’t matter what the journey is. So it doesn’t matter whether it goes up first, goes down first or whatever. But actually when you’re decumulating it makes a massive difference.
So on one hand the journey might give you a return of 30%, on the other hand depending on whether you have highs at the beginning or highs at the end, you might have a 10% return on that fund. So this is the bit that people need to get their heads around, that actually in retirement when you're drawing an income you have to manage that sequence of returns really carefully. So a lot of people might put cash for the first year. So where it really hurts is if you start drawing an income in the early years and the fund plummets, that’s when you get the real problems, because it’s very difficult for the fund to then recover. So again historical wisdom has always said you put two years as a cash buffer there. That again used to be the norm if you like with drawdown. And again quite a lot of people do that now.
There’s other ways of managing that: you could buy an annuity to provide an income in the early years. But the main thing is to recognise that there is a real risk there, and how do we cope with that? So is it, do you use a protected fund which has an element of underpin so that when you’re cancelling off units it’s always going to give you that level of cancellation, rather than if the fund’s down here. But it’s quite a scary thing, and if we get it wrong it makes a massive impact on the fund value at the end of time.
RICHARD NUTTALL: On that particular point, I mean even if someone’s taking advice often people have a basic level of income needs throughout their retirement. And while it’s always nice to say well markets have gone down, let’s not take an income. That’s not feasible in every single situation. And if a client doesn’t understand that particular risk, or is not comfortable with it, then you have to ask the question whether drawdown is right for them.
PRESENTER: And Aston, talk me through cover safeguarding essential exposure to protected or guaranteed income.
ASTON GOODEY: Yes, I think this is really important. So again what a lot of advisers will do is they will sit with the client and they will say what are your essential needs? So how much does it cost to put the lights on, how much does it cost to go to Asda every week, put petrol in your car, whatever it might be. And you work out that that’s going to be £1,000 or whatever the figure is. And then you buy the annuity element to secure that for life. So you know no matter what happens you know that you can at least exist. And then you layer above that. So what are the nice to haves? And this will change from customer to customer. So some might say holidays are a nice to have. Some people might say well that’s essential. For a lot of people they’re nice to haves. So we then say this is your essential, we’ve covered that with the annuity, the nice to haves we can then have through the drawdown element.
So if the drawdown returns aren’t great, actually if we don’t have the holiday it’s not going to change anything. I can still live and the house is still mine and so on and so forth. And it’s building that portfolio that way. And again in the drawdown you might say well we’ll have a protected fund to provide for those that like the holidays that do want an element of holiday, whether it’s to the Caribbean or whether it’s to Spain or wherever it might be, actually we’ll use a protected fund to do that bit, and then we might have some more esoteric funds or some high risk funds to try and get some additional growth beyond it. And that might be for people who want to change the car every three years or whatever. Again that might not be, that might be the layer above the holidays. So I really would like to change, that’s a real nice to have to change it every three years, but if I don’t it’s not going to really change anything, but actually if I didn’t get my holiday every year that would hurt a little bit. But actually the main thing is actually if you couldn’t put your lights on and you couldn’t afford your groceries every week, that’s a real problem.
PRESENTER: Well that brings us onto mortality drag, so before we talk about that let’s go back to Andrew to get a definition of mortality drag.
ANDREW TULLEY: So to consider mortality drag we have to think about how an annuity works. So an annuity is an insurance policy which guarantees an income for life. And it does that by pooling risk over a number of people. So a whole range of people buy an annuity. Some will die later than expected and some will die earlier than expected. And those people who die earlier subsidise the people who live longer. And that’s known as mortality cross-subsidy. If someone buys an income drawdown product they don’t benefit from mortality cross-subsidy, because it’s an individual product. So mortality drag is the extra investment return a drawdown needs to get to justify not buying an annuity. And as someone gets older it becomes harder to gain that extra investment return without taking significantly more risk.
PRESENTER: So Richard, mortality drag, is it fair to say then that drawdown becomes less attractive relative to annuity as perhaps a customer ages?
RICHARD NUTTALL: You could argue that would certainly be the case; it’s not going to be the case for everyone. I think that when someone reaches a certain age then I think one of the benefits is to look at annuitising some of those funds. But again it all boils down to income needs. Especially as well if long-term care may be an issue. That’s when that secured level of income is a real important issue for the individual. But I think when we look at these sorts of aspects we have to think about how we’re actually providing the income. Does it have to be actually provided through the pension, or are there other ways in which we could take an income, maybe in a more favourable income tax environment. So if an individual does have other cash savings or ISAs or other types of investments, maybe we could generate an income from there to actually leave the pension on hold.
So there are other ways in which it can be achieved, but again you wouldn’t expect any lay person to be in a position to really appreciate and understand the values of doing that. And that’s really one of again the benefits of an advice, of receiving advice. But again these are some of the risks that advice firms do have in terms of understanding those needs and aspirations of the individual, and understanding the wider investment assets and philosophies and approaches that the clients want from those.
ASTON GOODEY: Yes, I think the key thing to understand is does the client need an income? So the ageing population will get to a point where actually the returns that you need from the drawdown are highly unlikely relative to what you’ll be able to secure as an income with an annuity. So absolutely I think what we’ll see is all these people that have gone into drawdown now at some point will probably annuitize, because financially it makes sense if you want an income. There will be some people who actually just don’t need an income, and actually for those actually drawing anything from it won’t be a good thing, because all they want to do is leave that as an inheritance. And it’s a very tax efficient way now to pass monies down the generation.
So I think it’s just understanding individual client needs to determine whether actually is annuity ever going to be the right thing or not. But as a general rule if it’s security of income yes. If it’s about leaving an inheritance, actually you just wouldn’t buy an annuity.
RICHARD NUTTALL: And this is one of the biggest risks that firms have, is not having that conversation. So the individual turning round a number of years down the line, well you never mentioned about that, never told me I could.
ASTON GOODEY: Yes, and this is why annual reviews are so important for drawdowns, and might even be more frequent than that but at least annual reviews. Because it’s meeting you again, it’s assessing your needs, what’s your requirements, and then at that point you then revise. So you’re in drawdown, do I need to buy a bit of annuity? You take those points into consideration at that annual review.
PRESENTER: So Richard, when it comes to developing a robust centralised retirement proposition, what should we be considering?
RICHARD NUTTALL: You know this phrase about centralised propositions is often overused. I mean typically that’s been where a firm has one bucket which everyone is fed into, and generally that bucket is constructed through their own internal benefits. I think what firms really need to be looking at here is a range of different filters. So looking at the needs of groups of different types of individuals, and building solutions around that. whether it be cost effective solutions, whether it be risk managed solutions, whether it be more actively managed style investments through to discretionary investment, I think there needs to be a whole range of different filters where an adviser can go out, understand those needs, understand the objectives and goals and aspirations of the individual that can clearly identify which particular filter they should be then placed in.
Now those filters will look whatever that investment firm, pension adviser believes is appropriate for their audience, their target market. So can have a whole range of different connotations built in around that. But I think the need to understand the typical client and build in a range of possible solutions for them, as opposed to this thing about one end solution that would be relevant for all individuals.
PRESENTER: And how to ensure that client objectives are identified and verified then.
RICHARD NUTTALL: Well I think on this particular approach the term that we use is fact finding. It’s about understanding what the clients have. The problem with fact finding, it can often be seen as an audit exercise, where an adviser will sit down and tick some boxes and fill in some details which the clients have mentioned to them. I think for it to be effective we need to have these soft facts. And often the best way you can achieve that is by passing a plain piece of paper to a client and saying look tell me what it is you want from your retirement, put it on there and it’ll be my job to try and meet those goals. And I think what you have once you’ve delivered that initial advice is then the responsibility to provide that ongoing review. Although in reality it’s probably a new advice scenario every time you see the client, because you need to understand has anything changed, have their income needs changed, has their financial position changed, has their attitude to risk changed in terms of how the fund, how the markets have performed that particular time.
And we would always, as I mentioned before, expect to see cashflow forecasting. And that should be done, not just at outset, but I think that has to be done every time you sit down and see a client, because that’s the only way that people can actually visualise that retirement journey. And it’s really important that we don’t look at the drawdown review as it was previously under the drawdown review. So every three years we’ll go back and we’ll review that income which that drawdown is producing. This is about the need and the aspirations of the individual, and how that drawdown, how the other investments can actually deliver and meet those particular circumstances.
PRESENTER: Well finally let’s look at drawdown client books and the wider context of the business Aston, what should we be considering?
ASTON GOODEY: Yes, I think what concerns me is that there’s a lot of, there’s a huge amount of money now in drawdown. And it’s making sure that we stick close to those clients. And as Richard was saying certainly at least annual reviews, and understanding those needs of those clients. But what we’re encouraging them to do is just have a look at what you’ve got set in drawdown, and profile it. So have you got an ageing client? Because again drawdown has been around since 1995. There is an ageing book of drawdown, and it’s very easy just to continue in drawdown. But actually what you should be doing is just checking actually the health, so are they, when you last saw them have they become impaired, would they qualify for an enhanced annuity? And it’s always looking at what the alternatives are to a drawdown, and at what point is it right to phase out into annuity, if that meets the client’s needs.
So it’s just, it’s kind of just nudging and say right, how many clients have you now? Blimey, I’ve got 100, I’ve got 200, I’ve got 300, whatever it might be. Where are they sat, what are they doing? Are they drawing an income, are they not drawing an income? If they’re drawing an income what about sequential risk? So what happens if the markets suddenly fall 20%, are you going to get lots of phone calls from customers? Have you protected those funds? So again it’s just encouraging advisers to just take a review of not just individual client, which naturally will happen, but as a wider book what are you doing with this swathe of people, and do they need protecting, do they need to be phased, are they happy where they are, are they going to want an inheritance, at some point do they need an income, how are you providing income? There’s lots to be going on, but it’s very helpful that these annual reviews take place, and if anything I would encourage them more often.
RICHARD NUTTALL: And of course one of the biggest dangers is if this drawdown doesn’t meet the expectation of the individual; it may well mean that they’re likely to pursue a claim against the firm. And what’s really important is having that all documented and all recorded, and how you actually put that in writing to the client. And often you may have an annual review where you don’t change anything. But again it’s still equally as important to fully document that to the client.
ASTON GOODEY: Totally agree.
PRESENTER: Well now we are almost out of time. So if we were just going to summarise this Akademia session, I’ll start with you Richard, what do you think are the main takeaways?
RICHARD NUTTALL: I think the main takeaway is understanding the sustainability of income through drawdown, looking at some of the options to produce secure income, and any time you do have a client who is going into drawdown explain the importance of carrying out regular reviews with those individuals to protect the individual, but also the firm as well.
PRESENTER: And Aston, what would you say?
ASTON GOODEY: Yes, I think my summary would be pension freedoms is a great thing, and people are utilising pension freedoms. But it comes with some big risks. And it’s just making sure that we manage those risks properly. And also just don’t forget about the good old annuity. It’s served a lot of people very well in the past, and I’m sure it will going forward, and again it’s just getting that balance right between drawdown and annuity, and probably the Holy Grail is a combination of the two.
PRESENTER: Super, gentlemen thank you.
ASTON GOODEY: Thank you.
RICHARD NUTTALL: Thank you.
PRESENTER: In order to consider the viewing of this video as structured learning, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. By the end of this session you’ll be able to understand and describe, define drawdown post pension freedoms and its opportunities and challenges, to explain longevity risk, sequence of returns and mortality drag, and how to develop a robust centralised retirement proposition. Please complete the reflective statement to validate your CPD.