Advisers should focus on alternatives to annuities to help high-net-worth clients maximise their retirement income, claims Fidelity International.
In a new research paper: ‘Income Planning at Retirement’, Fidelity argues since A-Day financial advisers can increase their clients’ retirement income through “more sophisticated combinations of annuities, drawdown products and phased retirement plans”.
Although Fidelity admits the research, which examines alternative methods of decumulation to annuities designed to maximise income or preserve flexibility, is particularly relevant to “more affluent savers with pension pots of £100,000 or more”.
The 20-page paper shows how various options compare to the ‘default’ option of a level, single life annuity, as the modelling used calculates the probability of each alternative strategy producing a higher or lower pension from age 75 than the default option.
It assumes the same level of income is always taken between the ages of 65-75, at which point the remaining pension fund is converted into an annuity, and added together with any existing annuities in payment, to give the total pension income which could be obtained from age 75 onwards.
For example, Fidelity claims A-Day has “paved the way” for a more tax-efficient use of phased retirement plans, as since 6 April 2006 clients can use the 25% tax-free cash lump sum to generate their immediate income at retirement, leaving the rest of the pension invested until age 75.
As a result, the firm claims clients using “alternative strategies” like this, can boost their post-75 retirement income by on average 25%, while Fidelity points out a survey of 212 individual IFAs, carried out for the company in November, shows nearly 60% of advisers’ more affluent clients would choose draw-down over annuities.
In addition, the research paper outlines five key retirement planning guidelines which high-net-worth clients should take into account when thinking about their retirement:
- Consider using the tax-free lump sum wisely: Interest will be taxed if it is left in a deposit account, so a client could use it as income or invest it.
- Consider a greater exposure to equities if the client chooses draw-down: balance a higher income in the immediate years after retirement against the low probability of a reduced pension pot.
- Cautious savers may want to consider a blend of annuities and draw-down: A 50:50 split between an annuity and an equity-backed draw-down plan can lift income for less risk.
- Don’t discount phased retirement: Research shows an equity-backed phased retirement plan could deliver better expected outcomes than an equity-backed draw-down plan especially for the higher tax rate payer.
- Savers who want maximum income at retirement could use the tax-free lump sum to buy an annuity: Since April 2006 savers have been able to do this while keeping the remaining 75% of their pension invested.
Peter Hicks, head of IFA business at Fidelity International, says: “Advisers tell us their clients would like alternatives to annuities, which they regard as inflexible and poor value for money. Although at present drawdown is mainly only for clients with pension pots of at least £100,000.”
But he points out this is why, according to January figures from the Association of British Insurers (ABI), pension savers in 2006 bought more than 350,000 annuities compared with around 25,000 draw-down plans.
However, Hicks warns: “This will change as more savers retire with larger funds. Independent forecasts suggest around a third of pension funds will be worth at least £100,000 in the not too distant future.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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