Andrew Tully, Pensions Technical Director Retirement Advantage
We are more than a year into the pension freedom experiment, with the latest information showing nearly a quarter of a million people have taken advantage of the new flexibility. While many existing funds and strategies have been simply rebadged for today's retirees, a few have created step changes and The Retirement Account from Retirement Advantage falls firmly into the category of innovators. It has been designed to deliver the flexibility and simplicity that is required by both advisers and their clients in the new pension freedom world.
Retirement planning has often been a binary choice, turn left for an annuity or right for income drawdown. But that may not meet all of a customer's needs, as recent research we carried out shows customers place equal weight on the need for flexibility and certainty. There is no doubt many people are attracted by access to funds, flexibility over income, and the ability to cascade unused funds down the generations after their death. But they also value the certainty of money hitting their bank account each month so they can cover their essential expenditure - food, heating and so on.
And this is where a hybrid product comes in, providing both the security of an annuity to cover essential and important expenditure and the flexibility of a drawdown to meet ad hoc requirements. Traditionally, an adviser may have blended different solutions by identifying the best annuity rate and best drawdown product, using both to plan for the client's retirement. A hybrid product is different as the annuity and drawdown are held in a single pension wrapper. This provides complete control over whether the annuity income is paid out as taxable income, reinvested in the drawdown element or any variation of this theme. Being able to reinvest income before it is distributed and taxed enables more precise tax planning in retirement.
As the plan is written under pension drawdown rules it also means that any death benefits are paid into a beneficiary's drawdown contract. This, in turn, allows the beneficiary when using, for example, value protection, to spread the payment of the lump sum over a number of years to minimise the tax payable.
Examples of retirees who may benefit from using a hybrid solution include:
- Those currently in poor health, who expect to recover and so are in immediate need of a secured income but require it to be reduced or stopped in the future.
- Those who wish to receive an income prior to state pension age to cover fixed expenditure that can then be stopped or reduced as state pension income is received.
- Those who wish to manage their income within specific boundaries, ie utilise their full standard rate tax allowance, but not pay higher rate tax.
- Those who expect to inherit, but need a secure income in the meantime.
- Those who wish to reduce working hours prior to full retirement and supplement their reduced income.
- Those who have a Defined Benefit scheme and as a result are unable to make use of the new freedoms. The client may look to use the annuity element to replace some or all of the income they would have received from the scheme. And any excess can be used as the client wishes, perhaps as a lump sum withdrawal or invested into a pension creating additional income or inheritance planning opportunities.
- The discussions the adviser has with their client will centre on the allocation of their pension pot to the different elements of The Retirement Account. To enable such a discussion to take place, we have built an online quotation and application system. This allows you to simply and easily experiment with and understand the implications of changing the amounts allocated to each element. And it means you can target a specific income to be delivered by the annuity element to meet a customer's required income needs.
As well as this online support, we also offer a free telephone underwriting service, contacting the client at a pre-agreed time to walk through the variety of medical and lifestyle questions, then updating the quote to take account of this additional information.
Before pension freedoms, the obvious route for those with moderate and smaller pension pots was to take an annuity to provide security - a binary option which clearly lacked the level of flexibility required by many retirees. Hybrid schemes have emerged from the new freedoms to address the retirement income needs of a growing part of the over 55 age group, by giving an option which offers standard and enhanced annuity rates alongside a drawdown pension plan, all within one single pension wrapper. This allows people to alter the level of income received, and control tax paid on death in a flexible way designed to suit their individual needs.