The level of change in the retirement sector in recent times, can only mean that the adviser should be reviewing their own knowledge and processes for new retirement clients. They should also look at how these changes have affected advice already provided. By conducting reviews we can derisk the IFA drawdown book, and turn it to a business asset, rather than potential liability.
It has been 10 years now since the regulator, the then PIA introduced RU55, in August 1998, to set down the required knowledge and behaviours of advisers in the income drawdown market. Today we can see how appropriate that regulation has been, and how important it is that we go back and have a look at it again.
RU55 - section 4.3.2 states that "advisers should be aware of developments affecting the market." Key developments have been:
- Significant increase in longevity risk - we are all living much longer!
- The impact of inflation over the longer term - and the impact of corroding the value of a level lifetime annuity
- An array of new annuity solutions, including fixed term, impaired life and value protected, as well as "mortality gain" flexible annuities.
- A range of underpin guarantee products, which we can only expect to see increase as the traditional life offices enter this sector in coming months.
- New innovative solutions entering the market to effectively insure against longevity.
- Acknowledgement that the client's retirement income provision may now come from a range of assets, and not just pension alone.
These developments have two key results. The risk of inflation affecting the lifetime annuity is much greater, because life expectancy is that much longer, and the provision of unsecured solutions with lower risk profiles is increasing. Such is the extent of change that the adviser must be satisfied that they have reviewed their processes to ensure proper consideration is being given to the new range of options.
For the existing client, two key issues come into play. Firstly mortality drag, which data shows is in excess of 1% per annum for those over 70 - and increasing; and secondly investment volatility when targeting a fixed encashment date.
Starting each year 1% down, before charges, does not make the adviser's life any easier, let alone the client, who must be aware of this issue, and accept the risks. Note the alternative - a flexible annuity where you could start the year 1% up with mortality credits - 1% +1% = 2% differential - not zero!
When this is combined with a volatile investment portfolio the level of risk being taken on by the client can be unacceptable. Portfolio selection for income drawdown has to be cognisant of the exit strategy being planned, and the duration to the fixed point in time at age 75, where the final decisions must be made.
Action in this market is important. This is not to say that any advice has been poor, just that the environment has changed, and it is our job to let people know!
Source for mortality drag data: http://www.barnett-waddingham.co.uk/cms/services/actuarial/news03075/viewDocument - Table 1.
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