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A view to retirement

IFAs are often told by product providers about great potential markets and find that the reality can be very different.

One area that providers and advisers can all agree is attractive is the at-retirement market. Already, many IFAs have this as a core business area and demographics, coupled with the greater pension awareness and hence funding from the late 1980s onwards, will ensure an increasing market.

Phased retirement, income drawdown and the proliferation of new annuity variants with clearer open market option disclosure has made clients increasingly need advisers to help them determine the best options.

Regulators and PI insurers have, however, expressed their concerns that some advisers have been abusing their clients&#39 inexperience and recommending the options with the most remuneration.

It is a sad fact that, in some cases, this is only too true but this is also an area where many advisers are doing so much good for their clients. Formulating further regulation could equally create problems rather than solve them if it is not carefully handled.

The recent poor run of equity performance has obviously badly hit those with phased, drawdown or unit-linked annuities.

The insurers have managed so far to protect the values of with-profits annuity holders but even here the danger of the actuary taking out his red pen may be imminent if a recovery does not happen soon.

The adviser who has done a good job with a spread of investments, reasonable charges and a client who understands why they are in the product should survive with the client relationship intact. But what about those with less integrity?

I know of advisers who have been setting up drawdown accounts, taking 6 per cent initial commission and 1 per cent fund-based trail. They must surely be terrified that these clients will see their falling funds and income and instigate a complaint. Unfortunately, this type of bad practice, although it may get good advisers work in trying to pick up the pieces, is also likely to lead to bad media comment and regulatory and professional indemnity pressure that will adversely affect us all.

There are some simple checks to ensure that this business area has been dealt with properly.

Fact-finding

•Needs to cover health, other assets/income, dependants and death benefit issues, attitude to risk.

•Existing plan/fund information

•Should cover any penalties on transfer, any guaranteed annuity rates that may be lost.

Product recommendation

•Charges reasonable, fund choice and performance, ability to accept protected rights if needed and a Sipp option as although drawdown transfers are allowed the cost and resetting of the GAD rates could make that disadvantageous.

Portfolio design

•Drawdown especially requires a diversified income portfolio. There must be sufficient monies set aside in low risk funds to provide income in the short term, allowing the more volatile growth funds time to produce returns.

A high level of diversification is important, also, remember that income can be taken from specific funds with most providers giving the option of avoiding selling units at a loss in depressed sectors.

Income requirements

•Is the client getting the income they need in the most tax-efficient way?

•Does the reason-why letter accurately cover the clients situation and include the necessary risk warnings.

•Regular reviews are essential and an annual review with the client having the option to ask for an additional review in mid-year if they have a change in circumstances is the best balance.

More frequency can lead to being too interventionist and, in the current, highly volatile markets, a decision could be made that will look inappropriate in a matter of weeks. Also, greater frequency will be more costly in adviser terms if the client is paying for this, will they see a benefit?

What needs to be included in a review?

•Reappraise personal circumstances for any change in health, beneficiaries, finances etc.

•Level of income – is it sufficient, too high or low?

Comparison with annuity

Although our clients invariably are using drawdown because they feel annuities are unsuitable, it is useful to show them what current annuity could be bought from their fund.

Some clients might be looking to move progressively into annuities of one sort or another particularly as they approach the 70-75 age range to avoid the risk of annuity rates being worse at 75.

The majority of the remainder of the review then focuses on the investment portfolio.

•How is the manager performing against their peer group?

•How have individual sectors performed?

•Any changes needed in light of performance to rebalance the portfolio?

•Finally where should future income be drawn from?

Should drawdown be a permitted activity? I feel that the knowledge gained from holding either the G60 or equivalent or the CII K10 Retirement Options is really essential for providing the right advice in this area. For their peace of mind and to keep PI insurers happy, practioners should look to take these exams. For those who feel their knowledge is sufficient but are exam-phobic, a file review from Network or third-party specialist may be appropriate.

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