When Prudential introduced an income drawdown option as part of its Flexible Retirement Plan it could boast a product that offers the full range of retirement options to clients. Aston Goodey tells Helen Morrissey how the product has been received
Tell me about the Flexible Retirement Plan (FRP)?
The FRP is a holistic approach to retirement planning. We've built a proposition that runs through on a cradle to grave scenario. People can come in at 17 years of age for instance to accumulate wealth and can stay in the FRP right through until they are 75 and need to select how they receive their final retirement income. The client then has the ability to either move into one of our annuity propositions or ASP. It's basically a one stop shop for peoples' needs in retirement. In addition to this the moment the client enters FRP whether that be at the pension phase or drawdown phase they effectively start a time clock which allows them discounts on their annual management charges. The longer they've been in the FRP then the bigger the discount they are entitled to. For instance if a client has been with the FRP for 20 years or more then they can get up to 0.25% off the annual management charge (AMC). We also offer fund size discounts over time. You almost get a double effect of lowering AMCs to the point you get a total reduction of 0.55%. This is a great deal if your AMCs are 1%.
How long has it been in development for?
We built the FRP in phases by launching the pension first and then adding to it. The only thing that was missing was the income drawdown side which we added in November last year. That's really helped us cement our pension proposition. We looked at the market and thought about what the advisers really needed. To be able to bring what the adviser needed under one strong brand has been a very successful approach.
How has the income drawdown launch gone?
We've been really pleased. I think there is a genuine warmth towards Prudential in this space. Advisers seem keen to see us introduce a market leading product with all the bells and whistles that IFAs and consumers want. I think it's a market that as people get older they get more cautious and what you don't have at the moment is a plethora of recognised names in this market for the customer. We are a name that stands out as being strong and competent in this marketplace. You have to recognise that the sums of money going into drawdown tend to be around £100,000 so people need an assurance that that company will still be there in twenty to thirty years time to pay out on that income.
How do you see the income drawdown market developing?
I think it will be a healthy market going forward. We saw a blip post A-Day which will settle but I think volumes will remain significant. People will still look to take maximum tax free cash and nil income but we do need to be careful there. I'm mindful if individuals are doing that then they could leave themselves short of funds in the future. It's fine to draw 25% of your fund but people need to understand that it could lead to a lower income in the future. I think we will probably see people choosing to annuitise later in life as well and I think that will be a significant development. Buying an annuity is a one way transaction - the older someone becomes then the more likely it is that they will be impaired so if you can then buy an annuity in your later years and get uplifted terms then that's something that needs to be considered.
How are people using income drawdown?
People either take no income or maximum income so there's no real middle ground at the moment. People want to take tax free cash so take no income or those with large funds will strip out income and use it to enjoy life to the full, spoil grandchildren or gift it out for instance. I think ASP has helped fuel that in the sense that there are huge tax charges that people do not want to pay so stripping out income and depleting the fund is one strategy, annuitising later is another.
Have you seen people coming into income drawdown with smaller funds?
Yes. Our expected average is lower than we would have thought at outset. If you look back several years then income drawdown started at £250,000 and then that trickled down to £100,000 over time. We are currently at a minimum of £37,500 net. So it's certainly more accessible but you do have to be careful to assess whether it is the right thing for a person with £50,000 to go into drawdown. However, assuming the adviser has assessed whether it is right for the client then it's great to give the client more options.
What educational tools does Prudential offer the adviser?
We offer a comprehensive set of literature. We've gone out of our way to give as much support as we possibly can so we have lots of literature. We also offer GAD and tax free cash calculators that allow the adviser to work out what it will cost the client if they take their tax free cash early for instance. There are also asset allocation models the adviser can use and the transfer desk has been established too. Transfers can be complex and when we did research at the outset turnaround times were approximately 12 weeks. By using the transfer desk we've reduced the waiting time to around four weeks so we have had great success in that area. We did some calculations based on independent research and we've worked out we could save advisers £1000 per case just in terms of the administration we take away from them.
What have been the main challenges you have experienced in developing the FRP?
The shape of the market has changed post A-Day and drawdown is becoming increasingly popular. Challenges were often taken away by having a comprehensive product - when we had our previous drawdown product we didn't have all the commission shapes to suit the market so actually that could have been a big challenge. Similarly if you didn't have protected rights on the product then you've developed a challenge for yourself. We've tried to cover all the options from the outset so we didn't isolate ourselves from the market.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till