092 | Income sustainability

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  • Fiona Tait, Business Development Manager, Royal London Group
  • Jan Holt, Head of Business Development Team, Just
  • Lorna Blyth, Investment Proposition Manager, Royal London Group

Learning outcomes:

  1. The need that many of your clients have for guarantees for their income
  2. Strategies to create a solution for sustainable income for differing client needs
  3. Risk and the requirement to maintain an income flow
  4. How to create an individual income plan which may include other benefits


PRESENTER: In this learning module, we’re going to be focusing on the sustainability of income in retirement against a background of the recently introduced pensions freedoms; we’ll look at the need that many of your clients have for guarantees for their income; what some of the flexible and mixed strategies that are available to create a solution for sustainable income for different clients’ needs; risk and the requirement to maintain an income flow; how to create an individual income plan, which may include other benefits. Our three tutors have a lot of experience in helping intermediaries and clients in this field. They are Fiona Tait, Pension Specialist at the Royal London Group; Jan Holt, Head of the Business Development Team at Just; and at The Lectern, Lorna Blyth, Investment Strategy manager, also with the Royal London Group. They’ll be covering the use of annuities as a guarantee of income; annuity rates and clients’ objectives for income in retirement; capacity for loss; the effect of guarantees on the performance of portfolios; different approaches to risk reduction; tools to monitor income sustainability; flexible income requirements; personalised rates; stochastic versus deterministic approaches; death benefits and the need for nomination. Well I began our session in the studio by asking Fiona Tait when there has been such a drastic fall in the sales of annuities, is this because people no longer want guarantees or just that they are put off because annuity rates are so low? FIONA TAIT: I think that at some point in the future annuity rates probably will improve. But I would hate to think that that was the major driver of whether people buy annuities or not. People who are buying annuities should be buying them for the certainty that they bring, and the comfort that they have with knowing that their income will be paid every time that they expect to be paid. The problem is that most annuities are set up on a very inflexible basis, and it’s one that’s sort of one size fits all. And it’s very difficult when you’re in your 60s to actually make decisions that are going to affect the rest of your life, which could be 20 to 30 years. PRESENTER: And we were told that the annuity decision was irreversible. It was one decision for the whole of your life. FIONA TAIT: And with a conventional annuity it pretty much is. And people have to make very big decisions about inflation, about what’s going to happen with their spending, what’s going to happen with their family, and therefore you can very easily get it wrong by underestimating how long you’re going to live or underestimating what’s going to happen to prices. PRESENTER: So quite rightly people were and are frightened about making that one decision. FIONA TAIT: Yes. PRESENTER: All right, so we need to help them over this. FIONA TAIT: It’s a big one we need to help with them, yes. PRESENTER: Jan, now Just was a leading provider, and is a leading provider of annuities, what are your views on the current annuity rates, and do you agree annuity rates are at some point going to go up? JAN HOLT: Well we try not to predict the future, that’s incredibly difficult, but if we look back certainly the shockwaves following the EU referendum definitely took their toll on the gilt yields, which in turn underpin many annuities. So annuity rates did hit a low in August last year. However, it’s worth noting that they have bounced back, so they’ve recovered by about 6-7%, so they’re now back to those pre-referendum levels. And I think we’ll find that as people start to seek certainty. As the world becomes more uncertain once we move towards Brexit, once we see the new financial policies emerge in the United States then guaranteed income for life will certainly have a role to play. And I think the final point really is to make that distinction between the economic drivers of annuity rates, so gilt yields being a key thing, and other factors that influence rates like underwriting, for example, and I think we’re going to talk about that a little bit later on. PRESENTER: Yes, just notice a subtle change in the language there. You’re beginning to not use the word annuity, guaranteed income rate, that’s an interesting one. JAN HOLT: Yes. So I think the word annuity in itself I think possibly has some negative connotations for some people; however, when you offer them something that is guaranteed for the rest of their life they do view it differently. And it’s also in line with the ABI’s thinking where they’re trying to make pensions language a little bit more accessible to people so that they actually understand what it is that they’re talking to their advisers about. PRESENTER: So, Fiona, people still want certainty don’t they? That’s really what it’s all about. It’s just that they don’t like the rates at the moment, all these inflexible choices that we alluded to. FIONA TAIT: People do still want certainty, and I think most of us, most of the pension companies, we’ve looked into it and asked what people want at retirement. And yes, if they could have certainty and everything else as well then they would have. The difficulty is that in order to get that certainty there is a trade-off. And the main trade-off is lack of choice later on, the inflexibility that we’ve talked about, but there are other trade-offs as well. Some of this becomes easier as you get further into retirement. So as I hinted earlier most people are still buying annuities at age 65. And I would imagine that that’s something that might change. Because annuities, guaranteed income, has a part to play in retirement income, but it is difficult to say that’s it, that’s what we’re going to do for the rest of my life. PRESENTER: Now, Jan, Just has done some research on this, I believe. JAN HOLT: Yes. PRESENTER: What does that show us in this area? JAN HOLT: Well we’ve got a few charts we can look at. What was interesting was we researched over 3,000 people, and we broke them into the pre-retired and the already retired segments. And on the pre-retired group they maybe had somewhere between four and five years before they were going to be making those decisions. Their average age was around 61. However, what was really interesting from the research was that both the wealthiest and the least wealthy groups expressed a strong preference for guaranteed monthly income. So we’ve got a couple of charts that will show that. And the first group of well off planners 70% of them actually want that guarantee. Now, the driver behind that of course is going to be very different to the 78% of people who are struggling and concerned who want guarantees, because with those people, with that last segment, it’s about being able to pay the bills and do the weekly shopping and so on. For the well-off planners, they tend to have a very consistent lifestyle. They like to indulge in luxuries from time to time, and they don’t want anything to put that lifestyle at risk once they move to retirement from having work and salary. So different drivers but really interesting that that group that conventionally would have been viewed as very much the type of client who would only want drawdown, actually want guarantees too. And their preferences or their priority, the priority they placed about being able to pass money on, leave it behind when they aren’t around anymore, was a lot lower at 38%. PRESENTER: Interesting. JAN HOLT: Now that’s a view of an entire group of people. Clearly from an advice perspective you need to then establish those priorities at an individual level. PRESENTER: And give me an indication of the ages we’re talking about, priorities change at different ages do they not? JAN HOLT: Well yes they can do, and this group, as I say they were all, they weren’t at retirement so they were all in their early 60s. And people will as they move through I guess the early middle and later stages of retirement a lot of things will change. Not only their individual circumstances, but also their appetite to take on investment risk, their ability to deal with things like volatility, and of course one of the key things that needs to be established at every point in that journey is their capacity for loss. So how much risk somebody is willing to take may be irrelevant if the adviser’s view is that they don’t actually have the capacity or the wherewithal if you like to take on that risk. PRESENTER: Fiona, most annuities though are still bought at the age of 65 when to all intents and purposes people’s income needs are still pretty unpredictable aren’t they? FIONA TAIT: I would say so. It was interesting your point about consistency in the wealthier age group, because I think if you are looking, if you have consistent income needs then it probably lends itself better to actually making the trade-off and taking a guarantee. But for a lot of people when they’re 65 their needs are going to be very different. Hopefully most people are quite reasonably active at 65, and they’ve waited to retirement and they want to go out and enjoy themselves, and do the travelling that they’ve maybe not had a chance to do while they were still in fulltime employment. So we get a lot of activity in early retirement. And then gradually that tends to tail off as people become slightly less energetic than they might have been beforehand. PRESENTER: Long-haul to short-haul flights. FIONA TAIT: Yes, that’s a good way of putting it. And then you get, there is a third stage now which is becoming much more prevalent, where people are actually increasing their expenditure, and that’s to maintain their health, and being able to still keep their independence and so on. JAN HOLT: And I think that point you make comes through quite strongly again in the research. If we look at this next graph we can see that we asked all of our segments how much appetite they had to use all of their pension to secure that guaranteed monthly income. So despite two of the segment saying that was really important to them, none of the groups were actually willing to put aside everything in order to have that, because it’s this access to funds for more flexible spending that they were interested in. So it I guess supports the idea of having more than one solution to support the different objectives that people have. And of course for the client it’s one thing knowing what you want, and quite another understanding how to do that, which is where the adviser comes into their own, and the advice process. PRESENTER: You mentioned the capacity for loss, can you explain that a little more in a little more detail, and how that might be introduced into a conversation with a client at these stages? JAN HOLT: I think for clients who are entering retirement it starts to become about how they build the foundations to make sure that regardless of whatever else happens their monthly expenditure on essentials can be met. And then from there once you, if you can lock those in for the client through their state benefits, their defined benefits, and then maybe a layer of guaranteed income for life on top of that if you need to, then effectively you create capacity for loss. It pretty much does, may not matter what happens if those foundations are solid. So that’s certainly the philosophy that we would endorse and advocate that advisers talk to their clients about. PRESENTER: Fiona, you agree with that? FIONA TAIT: Yes absolutely. Everybody’s got a certain level of income that they can’t do without. And it should be a priority to make sure that those requirements are covered if they can be. I mean obviously there are circumstances where those requirements might have to be cut a bit, but establish that minimum and make sure that that is looked after. PRESENTER: So if people are looking for this certainty of guaranteed income, there must be some trade-offs in achieving this. FIONA TAIT: Yes, and that’s what I was saying. There are trade-offs with the guarantee. I mean everybody would love to have as much as they wanted to be guaranteed, but it does have an effect. And in the context of pensions if you’re introducing, or investments, if you’re introducing a guarantee there are two major trade-offs that occur. First of all you tend to pay more for the guarantee. The product itself tends to have higher charges. That’s not unreasonable because the product provider is taking on those risks, so you tend to have a higher charge. But the other thing that we’ve found through recent research that we did with Milliman’s was that if you’re providing a guarantee then usually that guarantor will actually invest much more conservatively than they would have done if they didn’t have to meet the guarantee. So you’ve also brought down your capacity to actually get high investment returns. So there’s two different ways that you are losing some impact if you choose the guarantee. PRESENTER: Indeed. I tend to view this in thinking about it that it’s gilts, bonds and then equities in terms of how you would in your own mind create a model for what you were talking about there. So, Fiona, people could in fact use different pensions to provide guaranteed incomes and some degree of flexibility for the future, is that? FIONA TAIT: Yes, and the research that you were sharing with us Jan, is showing there that people would like to have guarantees, and they are willing to take these trade-offs, but in most cases not with their entire pension income. And there are a lot of people we know coming up to retirement with Royal London where the pension that they have with us that they might be using flexibly isn’t their only plan that’s available. PRESENTER: Jan, you’re nodding wisely there. You’ve found this, that people don’t just have one pension pot as they used to in the old days. JAN HOLT: We did, it comes out in the research. Probably I think it was about 38% of the well-off planner segment also had defined benefits. So whilst they then had something to the tune of £145,000 on average in DC, it wasn’t their only pension resource. PRESENTER: And so if an adviser discovers there are a number of pension pots it provides another level of flexibility. JAN HOLT: It certainly does. In fact that’s one of the reasons why at the moment Royal London’s looking at whether, calling for partial transfers from defined benefit schemes. Because those people who’ve only got one, they don’t have this extra flexibility. PRESENTER: And of course if there is flexibility that brings us neatly on to the elements of risk, and it’s all your eggs in one basket syndrome. If you’ve got a number of pots you have less of a risky approach to this world. You both have two different types of approaches to this view of income in retirement. Talk to us a little bit about the Royal London’s, and then we’ll come on to you. FIONA TAIT: Yes, we offer alternative approaches to managing risk. The Royal London approach is rather than offering guarantees for the income, what we offer is risk managed funds. So the funds, there is no absolute guarantee but the funds are all run with a specific risk appetite in mind. So the adviser can sit down with the client and talk to them about the degree of risk that they would like to take. And we have a portfolio that would fit different risk appetites, and the adviser would choose that one. And what we do say is that we will run that portfolio within that risk budget, and it will always, we’ll monitor it as time goes on. PRESENTER: Sure, you take a slightly different approach. JAN HOLT: Yes, so we offer the guaranteed income for life solutions for those people who want some of that within their overall retirement portfolio. So through a pension annuity based contract. However, it can be a highly personalised solution, because with us it will always be fully underwritten, so it will always take into consideration the client’s health and their lifestyle when determining the actual level of income that they’re going to get. And then to support all of that we then offer a range of planning tools and calculators to help advisers figure out what the client’s overall plan should look like. Because I think we’re moving away now from the days when a straightforward fact find would actually do the entire job for that process; I think advisers need to layer in some more sophisticated planning tools, either to help with the decision making or as part of the presentation of solutions that they make to clients so that people absolutely understand what it is that they’re taking on, what risks they face, and how the adviser’s going to work with them to manage and mitigate those risks. FIONA TAIT: The future adviser’s definitely going to involve more sophisticated planning tools. And obviously a lot of the wealth advisers already use many of the tools that are available. But I think they’re becoming more accessible. PRESENTER: And these really are tools to maintain income sustainability. FIONA TAIT: Well that’s one set of tools, and certainly that Royal London has looked at. So we have tools that help advisers assess what the different retirement options are, and how they fit with that client: risk assessment, capacity for loss. But recently yes we have launched the drawdown governance tool. And the idea with that is that the adviser continues to work with the client to ensure that they don’t stray outside those objectives that they set at the beginning. Because you can say at the beginning I want to take out 5% a year, and then something happens in the market and that actually has a bigger impact than you expect it. Or perhaps it goes the other way, which is great. So with the monitoring tool it allows advisers to see really quickly you’ve gone outside where we expected you to be. PRESENTER: Well let’s go over to Lorna Blyth now, who’s going to give us more information about the drawdown governance tool and the scoring system. Over to you Lorna. LORNA BLYTH: The main thing about drawdown is that it needs to be reviewed regularly in order to avoid the client running out of money. One of the key conversations you’ll have with your drawdown clients is how to achieve a sustainable level of income, and while everyone’s needs and circumstances are different, this will typically depend on a number of factors. Such as how much you’ve saved, how long you want to take income for, what charges you’re paying and any investment growth the fund’s received. Now some of these factors will have a bigger impact than others. But generally the shorter the term, the lower the income being taken, the lower the charges and the higher the growth, and the more likely it is that the income will be sustainable. This is our heat map, which shows how sustainable different terms and withdrawal rates are. It assumes investment in a low risk multi-asset fund, and a 1% charge. Now we’ve categorised the scores into different bands, so that we can understand what good and bad looks like. For example we think 85% or more is highly sustainable, because it means that 85% of the time the customer will achieve this level of income or more, and 15% of the time they may achieve less. A score of less than 50% means half the time the customer will achieve less than their desired income. Therefore we’re categorised that as not sustainable. The purpose of this of course is to generate a conversation between the adviser and customer to discuss what the score means for them. You can see here that overall terms shown a withdrawal rate of 3½% is highly sustainable, and that over a 15-year term a 6% withdrawal rate is highly sustainable. Where it starts to get interesting is really between the 4 to 6%. As term increases beyond 15 years 6% quickly becomes unsustainable. This is useful to show how term and income withdrawals impacts sustainability, and can be a really good starting point for discussion with your clients; however, we can get more specific than this. There are tools available in the industry which will paint a picture of how sustainable different income levels are based on individual customer circumstances. This helps you to manage your customer expectations of the income that they can get and how long they might expect it to last. This is extract from our income planning tool, which shows a score for a client aged 65 based on an income of £4,250 each year for 25 years until aged 90. It assumes a charge of 1% per annum and investment in a low-risk multi-asset fund. It shows that the client has an 86% probability of being able to take an income of £4,250 or more. If we change the timeframe to a 20 years period we can see that the client has an 89% chance of taking at least £4,750. So by reducing the time he is taking income for by five years he can take an extra £500 per annum, although remember this is over a shorter timeframe. These scores are based on how much the client has saved, the level of income they’re taking, how long they’re taking it for, the investment choice, and the level of charges. It’s a stochastic projection of what the client’s income might look like, and each quarter this is updated to reflect current market conditions and the outlook for each asset class. Keeping track of individual sustainability scores for each customer, and how they are tracking can get complicated. Royal London can help with this. Our drawdown governance service helps you track how the score changes each quarter based on any changes made to the plan and current expected growth rates. The dashboard gives you an instant health check of customer plans, and is colour coded so you can see how each plan is doing. Each colour is rated one to five. One means your client’s income sustainability is on track. Remember regular reviews and active management of a client’s income drawdown plan can highlight any adjustments needed to help keep them on track based on what you agreed with your client. You can also keep track of how many reviews you’ve carried out. Further down the dashboard is a list of your clients. They’re organised in priority order with red at the top so you can quickly see which plans most need your attention. The point of this is that there are tools available in the market which provide information for you to consider, model and explain the risks and trade-offs each customer faces when planning for retirement income. PRESENTER: Thank you Lorna. How different, Fiona, is this to what used to be the old GAD rates? I have to confess I was a fan of the GAD rates in my time; at least it gave you some view of what was going to go on in the world. FIONA TAIT: Yes, and that’s exactly it. The difficulty with GAD rates always was that they were one set of rates for absolutely everybody in the universe. OK technically we had male and female at one point, but generally speaking if you were a female that was the rate you were given. So it didn’t adapt to individual circumstances. And what we have now with the stochastic modelling tools and more individual underwriting that you have is where solutions are being tailored to that individual, which GAD didn’t do. What GAD did do was it did give you at least a parameter. And the other reason that the tools are so necessary is there is no parameter now. Now without GAD there’s nothing to say what’s reasonable unless you work it out. PRESENTER: Jan, this is, there is a need now for a very highly personalised approach isn’t there? JAN HOLT: Yes, there is, and Fiona’s right. With underwriting, for example, we used to use language like standard clients and enhanced or impaired clients, and we’re prompting advisers really to drop that thinking, because new thinking says something entirely different. So we used to have this world where if you had 10 people and they were all classed as standard they’d all get exactly the same annuity rate offered to them. And then if you then crossed that line of qualification you’d become enhanced or an impaired annuitant and the level of income you would get would go along a continuum depending on how ill you are really. The concept of the more ill you are the more income you’ll get. PRESENTER: Let’s have a look at that on the slide. JAN HOLT: Yes. So we’ve got the slide that shows that, and that’s pretty much how most people will still view the world when it comes to buying an annuity. However, what we’re now able to do is to remove that qualification line completely because our underwriting processes are becoming so sensitive to things as simple as height and weight and living arrangements that pretty much everybody will have their own longevity curve, and therefore get their own individual rate. So if we put that to the test we’ve got five clients here who on the face of it all look broadly similar, and you may in the past have said well they’ll be standard so we’ll just use our portals and we’ll get the best standard rate that we can. However, without studying in great detail the individual heights and weights and so on, if we skip onto the next chart we can see that they all get very different terms. And in fact Helen at the highest level of income there gets nearly £700 a year more income than Bob. And yet if you were trying to make a judgement call to decide whether or not you should get an underwritten quote for these people you may well have been tempted to think well they’re probably not going to get any better, and yet the range of rates there is individual to all of them. PRESENTER: Yes indeed. JAN HOLT: And if you were wondering, Helen gets the highest rate because first of all she’s divorced so she lives on her own. It may comfort you to know that if you’re living with somebody else then your life expectancy becomes higher in theory. I think the theory is if there’s an emergency then they’ll call the emergency services for you. FIONA TAIT: Glad to know my partner is useful. JAN HOLT: And also she’s got a very low BMI, which in the underwriting world potentially means she’s less able to fight off illness and infection and so on. So everybody gets a personalised rate now, and we need to stop using language like qualification, enhanced and impaired. PRESENTER: Absolutely, that’s really important from an adviser’s point of view to have those sorts of discussions with that sort of language with their clients. So this is, there’s another degree though, it’s the need for flexibility. And this is Royal London’s approach is it not? JAN HOLT: Yes, so the… PRESENTER: Flexibility of income levels. JAN HOLT: Absolutely, so the idea of having the managed portfolios rather than a guarantee is that people are still invested basically in a personal pension. And so they can change the level of income that they’re taking, they can take out lump sums if they need to. We’ve come across all sorts of lovely cases where people have actually needed a lump sum for strange reasons, couldn’t have been foreseen, and it’s there and they’re able to do that if they need it. So it’s keeping the flexibility open whereas you can get the best annuity rate possible, but you still have slightly less flexibility than you would have if you were still invested. PRESENTER: Now, you do give some help on this, so let’s go back to Lorna to explain sequencing risk and stochastic versus deterministic modelling approaches. LORNA BLYTH: So the issue here is how we set realistic expectations with clients in terms of what they can expect at a future point. Illustration or cashflow modelling tools normally use deterministic modelling to illustrate what future benefits might look like. However, this type of model assumes that growth is even and constant throughout the period. So typically the model will look at the investment being used, and will use an average growth rate for a low mid and high scenario. For example a balanced multi-asset fund could use 5½% as a mid-growth rate. Now typically these rates are reviewed at least annually to make sure they remain reasonable given current market conditions and taking long-term expectations into account. The final fund value is then the starting value with the average growth rate, less the product and adviser charges, if applicable, compounded over the number of years used for the projection. This assumes no regular premiums or withdrawals. This means that the client is provided with three outcomes of what their fund value might be in the future. However, in practice, the customer’s investment choice is likely to provide a different growth rate than those used for mid low or high. Here is a real life example of what can happen in the investment market. This graph shows annual returns from the ABI mixed investment 40 to 85% sector average each year since 1975. As you can see growth is not constant or the same each year. The orange line shows that over the 40-year term the average annual return was 11%. But in reality within any one year returns were as high as 38% or in 2008 fell 20%. The question is how much impact does this variability of returns have on a customer’s outcome? Well the answer is that it does impact outcomes. It’s called sequencing risk. And while it’s noticeable in accumulation and in decumulation, it really makes a difference when we’re in drawdown. Let’s look at an example. Here we have £100,000 invested. Growth is constant at 7%, and the customer’s taken out 7% income each year. So at the end of the 10-year period they still have retirement savings of £100,000. Note we’ve made no allowance for fees, although obviously these would impact the final value. In this scenario growth is not constant. It’s higher in the early years than in the later years. Assuming the customer is still taking an annual income of 7%, this time at the end of 10 years the fund value is worth over £120,000. This is because all the growth occurred in the early years, and before too many years’ worth of income had been taken from the plan. However in this example we can see the negative effect sequencing risk can have on retirement savings. Here everything is the same, except growth is poor in the early years when the pot is largest. And the high growth doesn’t occur until the later years. In this example the pot is only worth around £71,000 after 10 years. So it begins to feel like the impact is big enough that we need to take this into account. And a deterministic model will struggle to help us here. In order to give some idea of what different outcomes a customer might expect we really need to use a stochastic model. This type of model takes account of the fact that growth is not linear or constant, but in reality moves up and down. So it assumes lots of different scenarios with lots of different growth rates. Typically it’ll assume a thousand different outcomes for the client. So the starting fund value is compounded by a wide range of growth rates, which may move up and down over the period. Some outcomes are unlikely or outliers, whilst there’ll be lots which deliver similar results. This also means we can attach a degree of probability to each outcome. The benefit to the client is that they get a better understanding of what their future benefits might look like. The range of outcomes and what is a likely outcome, and the benefit to you is more robust financial planning, which helps you to manage customer expectations better. PRESENTER: Thank you Lorna. Jan, there are some simpler approaches to stochastic risk modelling aren’t there as well? JAN HOLT: Yes there are, and if you’re working with maybe a less sophisticated investors then we’ve got our own model, which I guess you might call stochastics made simple, because it’s really aimed at helping people understanding if you’re trying to articulate the benefits of both drawdown and guaranteed income what the risk of running out of money while they’re still alive might be if they took the same level of income from drawdown as they were being offered through guaranteed income for life. So it’s a pretty simple approach, and it’s more about supporting the communication and presentation of information process than a full stochastic model. PRESENTER: It is vitally important that an adviser understand stochastic modelling. FIONA TAIT: Yes, and the difference between that and a deterministic approach, which is historically what most advisers have had access to. Again it just caters for more different scenarios. PRESENTER: Critical yield, there’s a topic we can get our teeth into for a moment or two. It is very important from a portfolio point of view is it not? JAN HOLT: Well it can be. It can be a good measure of sustainability, and also suitability of drawdown for clients who are using drawdown to take a regular income. And I think the important thing here again is personalisation. So if you were to take a critical yield based on a typical or average rate or average client, then it may well bear no resemblance to the client who you’re actually working with. So we’ve got a list here of some of the assumptions that come into the critical yield calculation. So how long is the term before the client might consider annuitizing, what’s the underlying investment return being used, i.e. the annuity rate, and then also you need to factor in things like the shape of the annuity benefits that might be taken, costs and charges and so on. So if we flick to the next chart we can see that just using one of those criteria, which is the underlying annuity rate, there’s a huge difference between the worst rate that might be feeding into that critical yield, and the personalised income at 6.05% versus 7.89%. So you’re going to get a very different result from a critical yield, for the critical yield number if you use both of those figures. And so again it’s important that we make this an appropriate test rather than just use averages or inappropriate benchmarks. PRESENTER: Fiona, any other factors to take in? FIONA TAIT: Well I think it’s good to have the critical yield there, because it gives you that sort of outside level of the risk, but you absolutely can’t take it in isolation, and you do need to look at what might happen and different scenarios, not just. The critical yield does assume that you’re getting the same income every year, as Lorna’s slides were showing. So by all means it’s a factor, but it shouldn’t be the only factor. PRESENTER: All right, something of course which everybody thinks about when they think about insuring the future as it were are death benefits. As part of DB schemes death benefits were one of the most important aspects that you were persuaded in to taking a pension for when you were employed by somebody. Death benefits in the modern world? JAN HOLT: Well for annuities you can be a lot more flexible around death benefits than previously. And I’m not sure how much people are properly using the new death benefits. So for example you can now write the guarantee period on annuity to go on for as long as 30 years. And historically the options were a five or a 10-year guarantee. In our experience today advisers are still recommending five and 10-year guarantees, which doesn’t feel right and it doesn’t feel like a personalised approach to helping meet the client’s objectives. So again it’s about understanding what they’re trying to protect and for whom, and then using either guarantee periods, joint life benefits or value protection lump sum death benefits, or maybe a combination of some of those things to create the right plan. And it can be done, so it’s a bit of a fallacy to say the only way to pass pension wealth on is through drawdown. You can pass some of it on through annuities if you structure the benefits in the right way. And you get the same tax advantages. PRESENTER: I was going to say, or at least it might help with some other aspects of inheritance tax planning in that respect. JAN HOLT: Yes. PRESENTER: Now, Fiona, from your point of view the passing on of funds through generations, and the need for nomination. When I sit down with my adviser he’s always reviewing that little bit, who are you going to leave it to? FIONA TAIT: Well I’m very glad to hear that, that’s great. I’d take a slightly different from Jan. I think that with drawdown it’s still is the most flexible way to pass on death benefits. Yes, there are a lot more options now with annuities, and I would encourage people to use them. But you still have to make these decisions. JAN HOLT: Yes. FIONA TAIT: And plan it upfront. One of the advantages of income drawdown is that you can change that nomination as your circumstances change. However one of our concerns is that maybe not everybody does, and we come across nominations that are 10, 15 years old, not just in drawdown clearly. And we would urge financial advisers it’s not a big thing to do, but it’s a really important thing just to make sure that nomination. PRESENTER: It’s a very simple question isn’t it? FIONA TAIT: Is up to date. The other thing to be very careful of is whether or not you are actually using a nomination or an expression of wish. Now the two terms are actually used interchangeably by most people. It doesn’t really matter what the nomenclature is, but the key is are you leaving the disposal of those assets to the trustees’ discretion, or are you telling the trustees who you want those benefits to go for. And the reason that that is absolutely crucial is if it’s under trustee discretion then it is almost certainly going to be free of inheritance tax; whereas if you do it as an absolute direction, then it will almost certainly be in the estate. PRESENTER: That’s fascinating, really important distinction there, thank you very much indeed. A final word from you both then, Jan from you first of all. JAN HOLT: So for me I’d say where guaranteed income for life is going to be part of somebody’s retirement solution, then make it personal. So personalise the illustration in relation to the client’s health and lifestyle, personalise the death benefits, and personalise the minimum income requirement that the client has so you know what needs to be in that foundation. PRESENTER: Fiona. FIONA TAIT: I’d absolutely echo the personalised approach. There are huge decisions to be made at retirement. Whether or not you want a guarantee, how much of a guarantee do you want, and I strongly believe that those are decisions that really need to be made with a professional financial adviser if at all possible. PRESENTER: Fiona and Jan, thank you very much indeed. BOTH: Thank you. PRESENTER: In order to consider the viewing of this module as structured learning, you must complete a reflective statement to demonstrate what you’ve learned and its relevance to you. By the end of this session you will be able to understand and describe the need that many of your clients have for guarantees for their income in retirement; what some of the flexible and mixed strategies there are available to create a solution for different clients’ needs; risk and the requirement to maintain an income flow; and how to create an individual income plan, which may include other benefits. Please now complete the reflective statement in order to validate your CPD.