Category : Guaranteed Drawdown

3 Drawdown solutions with guarantees

Posted By: Phil Handley DipPFS AwPETR On December 7, 2015 Category: Guaranteed Drawdown

I have many clients who want the features income drawdown provides but don’t have a high appetite for investment risk. This is either though inexperience of investing, no desire to keep an eye on investment markets in their retirement years or not having capacity for significant losses.

So what alternatives are there that offer some of the features but without risk?

To answer this question it’s important to define the risk you’re wanting to alleviate.

Volatility Risk

Exposing your pension fund to markets through investment funds will carry risk to capital, meaning your fund value can go both down as well as up. The amount it moves in either direction will usually be linked the overall risk level the fund aim to follow.

Risk & Return

Think of 10 risk levels, 10 being high risk and 1 being low. A risk 10 fund will be highly volatile and may go up 20% in one year and down 20% the next. On the other end of the scale a risk level 1 fund (there are very few) may go up 2% one year and down 1% the next.

Volatility risk is therefore the amount of risk you wish to take in order to seek higher returns but with the knowledge of potential downsides.

Some people don’t want any risk to capital through volatility, that’s ok, we’ll discuss the potential options for those type of clients below.

Longevity Risk

This is the risk of having a drawdown plan where the money runs out before your health does.

One of the downsides to standard drawdown is that there is no lifetime guarantee of income, unlike an annuity. You trade off flexibility to access your fund at your leisure but carry all the risk yourself that it may run out.Drawdown Funds running out

This is of particular concern because as a nation we are all living longer and we don’t know what age we need to budget until.

The fear of running out of money in drawdown can be compounded if the markets suffer negative returns in the early years, we’ll discuss below some potential solutions if this is of particular concern.

Drawdown with Capital Guarantees

Certain providers and funds offer a guarantee of fund value after a certain term, usually around 10 years and above. This protects the original fund value at the end of the specified term, regardless of market performance.

Therefore, if £100,000 was invested, and at the end of the term the market value reflected £80,000, the guarantee would increase the value back to £100,000 (provided no income had been taken).10 year drawdown guarantee

If income had been taken, the original value less income could be guaranteed.

So if £10,000 income had been taken in the above example, £90,000 would be guaranteed.

This could be used for an amount of your pension fund you don’t intend to need in the next 10 years. For example, if you had a fund of £100,000 and needed £5,000 income per year, £50,000 could be earmarked with a guarantee (providing the other £50,000 was at no risk and held in cash for withdrawals).

This would provide potential for growth within an investment fund but secure the original investment should markets fail.

There are number of ways and reasons these guaranteed are used, they do come at an additional cost however. Expect to pay 0.3-0.6% more per annum for the guarantee.

Drawdown with a guaranteed income.

As discussed earlier one of the main risks of income drawdown is running out of income. This could either be from poor performance or taking too much in the early years.

Drawdown with a guaranteed income can overcome this issue.

There are a number of providers who have historically offer this solution and a couple of new ones who have entered the arena since April.

Some provider operate this by offering a lifetime income based on an initial fund value. The fund stays invested but if it runs out through poor performance, you are guaranteed to have a lifetime income, as long as you don’t take out more than the plans recommended income (this recommended income can also grow if the fund performs).

Other providers essentially buy an annuity with part of your fund and offer the rest as a flexibly accessed drawdown pot.

There are occasions if you take out more than the recommended amount, that the plan won’t provide a lifetime income. It’s therefore important you fully understand these plans before opting in.

Fixed Term Drawdown with Guaranteed maturity value.

The official name for this is a fixed term annuity, but it’s not an annuity. It’s actually a form of drawdown and follows the same regulatory rules.

At the outset you decide how much income is required per year and over what term. Once these two options are chosen a guaranteed maturity amount is provided on day one.

This is the figure you are guaranteed to receive back at the end of your chosen term.

It is not exposed to investment funds and therefore won’t fluctuate or incur any ongoing charges.Fixed term annuity

The rate of growth which is applied to the fund will be based on the term chosen. This is usually similar to deposit based interest.

These are generally for people who don’t want to tie their money up in an annuity, but don’t want the investment risk of income drawdown.

They provide a known income for a known term with a known outcome.

As drawdown develops for the mass market, providers will continue to innovate and offer something for everyone. The downside to this is too much choice. For those reaching retirement there is a feeling of ‘where do I start!’.

Drawdown with guarantees offers a solution for those who don’t wish to tie their funds up in annuities and may wish to pass assets onto their estate. Inevitably there is a trade off, either through increased cost or performance restrictions.

 

 

 

 

Guaranteed Drawdown gathers pace

Posted By: Phil Handley DipPFS AwPETR On September 30, 2015 Category: Guaranteed Drawdown Pension drawdown

Guaranteed Drawdown is the hot topic in retirement solution innovation. Since the pension freedoms in April, there has been a big shift from annuities to drawdown, but the two products couldn’t be more different.

The choices facing retirees today seem overwhelming, it used to be easy, pick an annuity with the highest income offered and retire. The flexibilities and access to full pension savings offered by drawdown have meant a majority shift in take up resulting in drawdown now being the most favored option.

Whereas an annuity offered lifetime security, drawdown doesn’t. The trade-off is the ability to take additional income when needed, but as drawdown is an investment, poor performance could result in funds running out all too soon.

This is where Guaranteed drawdown tries to snuggle in. Described as a halfway house between an annuity and income drawdown it aims to offer a guaranteed lifetime income but with the ability to take additional income if needed.

The main players in the market are MetLife, with similar offerings from AXA and Aegon, who launched a product this year. The main concern with these products is their charges. The guarantee doesn’t come for free and ongoing charges can look expensive. There is an argument that if you want a secure lifetime income but with the ability to take extra income, buy an annuity with some of your funds and put the rest into drawdown.

There has been plenty of market research by the likes of MetLife stating that people want at least some guaranteed income for life but also flexibility (95% stated this in a recent survey), but many are unwilling to pay the additional costs. Their annual costs are around 1.65% for a £250,000 fund.

The dominance of the MetLife could well be coming under attack as providers see an opportunity in this sector. Zurich are planning their own version and more recently Partnership are looking to launch a low-cost version. MetLife have recently relaunched their product with some tweaks to try and stay ahead of the game.

Partnership, the enhanced annuity provider has needed to innovate since the annuity market dropped off a cliff following the March 2014 pension reform budget announcements. They plan to offer a guaranteed annuity income with flexi-access drawdown through a single pension account. The product isn’t due to be launched until Sept but may well challenge the MetLife plan. Partnership have vast experience of underwriting annuities and could therefore offer a more attractive guaranteed income than MetLife, which is based on a percentage of funds.

The extra competition is going to continue to drive costs down and force innovation, which is all great news for retirees. We believe guaranteed drawdown will become more popular as it becomes more known and better priced. The trouble at the moment is that its one of many options for retirees and the choices are overwhelming. The education of retirees is largely done by the Sunday financial papers and guaranteed drawdown isn’t widely discussed.

Zurich announce plans for Guaranteed Drawdown product

Posted By: Phil Handley DipPFS AwPETR On September 13, 2015 Category: Guaranteed Drawdown Pension drawdown

Zurich is the latest provider to bring more innovation to the at-retirement market with a proposed guaranteed drawdown product. It will allow an income to be taken as flexibly as drawdown but with the option to convert to a lifetime income in the future.

Zurich is one of the world’s largest insurance groups, with over 60,000 employees serving customers in more than 170 countries they have over $32bn in shareholder equity.

The new product is aimed at those who like the ability to take variable income such as through drawdown but also fear the possibility of running out of money.

As yet the finer details of the plan are unclear, however it seems at the outset, the customer will be able to choose a protection element alongside their drawdown plan to allow for conversion into a life time income in the future. There will be specific ages at which a conversion can occur but unlike guaranteed drawdown products from the likes of MetLife, it will not ‘lock in’ any growth in stock market performance.

It will be available through its own platform but as yet Zurich have not given any indication of price or charging structure. It will have to be competitive however as MetLife, AEGON and AXA have been active in this sector for a number of years.

Zurich are responding to some of their own research which showed a marked uptick in demand for drawdown since the reforms came into effect in April. They found, unsurprisingly that there had been a massive shift from those purchasing an annuity to income drawdown, however that 18% feared running out of money.

Zurich’s research since the reforms found

Zurich’s post-pensions freedom research found…

  • One in ten over-55s in defined contribution pension schemes has dipped into their retirement savings under the new freedoms;
  • 69% of over-55s have not explored their options under the new freedoms (37% were ‘not ready’, 26% had already bought an annuity);
  • The main reasons for not accessing pensions after exploring options were:
  • 54% were not ready to make a decision;
  • 34% were keeping their pension funds invested and tapping into other assets first;
  • 18% claimed the fear of running out of money by taking a lump sum or going into drawdown was holding them back;
  • 7% said their pension provider did not offer the option they wanted.

The pace of change in the drawdown market since April has been rapid. It has become a much more lucrative and competitive market and providers are constantly changing their pricing structure and propositions to gain market share.

The good news for the consumer is that providers are adapting to the concerns of the investor. With so much choice and variability of options it’s always going to be overwhelming to a new investor however.