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‘Advisers are wrong to dismiss guaranteed drawdown’

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The Lang Cat has called on providers to better explain guaranteed drawdown products as it argues advisers are wrongly discounting guarantees as part of the retirement planning process.

Guaranteed drawdown products – often referred to as unit-linked guarantees which combine drawdown with assured levels of income – have increased in popularity since the pension freedoms but are still often seen as expensive or underperforming.

A report from The Lang Cat, published today, found that projecting back over 25 years guaranteed drawdown was found to generate higher income than both drawdown and “third-way” products. However, death benefits were marginally lower than third-way products.

In a simulation of volatile market conditions, guaranteed drawdown was found to provide a steadier source of income than drawdown or third-way products.

The report says: “Perception is much more of a barrier to guaranteed drawdown usage than raw cost. With an outcome-focused approach, client needs can be well met from the range of products available, and that includes guaranteed drawdown.

“But no adviser or client is going to use something he/she doesn’t understand, and it shouldn’t take a PhD to work out what’s going on. This is one for the marketing departments to sort out – and if they can, there is no reason why guaranteed drawdown shouldn’t form an ever greater part of the retirement planning landscape.”

The Lang Cat argues for clients who do not have an aggressive risk attitude, advisers must look at options outside of traditional drawdown.

The Lang Cat principal Mark Polson says: “If you’ve reflexively dismissed guaranteed drawdowns as too expensive, you don’t get to do that anymore. Sorry. There’s no good reason why guaranteed drawdown shouldn’t form a part of the retirement planning landscape.”

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. I still stick to my view that unit-linked guarantees have a strong customer proposition but the devil is in the detail.

    The problem is advisers and their clients still don’t know or understand the detail

  2. Couldn’t agree more, but try convincing a client that the level of income being produced is acceptable for their requirements (in many cases), after all of the costs and guarantee charges have been applied.

    Great concept, but there is no such thing as a cheap fix where capital/income guarantees are required presently. Still needs to be considered though and demonstrated in any review regardless.

  3. Clients do not need to know the detail but advisers do and frankly the latter cannot be bothered. They assume because the charges are so high that they are “expensive” especially when the adviser charge is included. But in the case of the latter, advisers do not have to take it especially an ongoing charge. Just think how much clients pay for traditional drawdown over the years especially so that firms can get their 1% trail.
    We concur, these contracts have performed very well and there is a real question as to why they have not been considered by advisers and discussed (as a concept) with clients.

  4. If you don't understand it... 26th October 2016 at 9:51 am

    “But no adviser or client is going to use something he/she doesn’t understand, and it shouldn’t take a PhD to work out what’s going on”

    Couldn’t agree more with this statement – most of these products are very difficult to understand – if it’s not clear to an adviser, why on earth would we promote these to clients.

    The products include costs, assumptions and profits for the providers – many IFAs are perfectly capable of keeping client costs down, diversifying investments and managing withdrawals to avoid the impact of adverse volatility during decumulation.

    More transparency on product disclosure, counterparty risk and I’d guess there may be more traction with these products, although the more I’ve looked into the detail the more I’ve been inclined to avoid them…

    • Absolutely spot on. From what I have seen – an income almost in comparison to an annuity rate, with higher charges and the probability that income can go down as well as up. A great proposition for someone who is relying on a reliable and sustainable income stream in retirement.

    • IMHO, If you can’t understand how U-LG’s work – AND DENY YOUR CLIENTS ACCESS TO THEM – then that really does call in to question whether you should be a independent financial adviser.

      Fine if you’re of Restricted status and your firm has restricted its palette of products it recommends not to include U-LG’d pensions, bonds and ISA’s. Not so if you claim to be of Independent status.

  5. I do not have a PhD but I managed to get my head round this concept. Admittedly I was unable to persuade an adjudicator at FOS that it was suitable but the ombudsman understood and threw the complaint out.

    If an ombudsman can be made to understand, surely they can’t be that complicated.

  6. I can get the concept, but would be interested in seeing The LangCat’s research as I have also read that guaranteed drawdown products deliver poorer outcomes than the safe withdrawal rate.

    http://www.finalytiq.co.uk/are-guaranteed-drawdown-products-worth-the-paper-they-are-written-on/

  7. The elephant in the room is counterparty risk. If Lehman Brothers a ‘AAA’ rated bank can go under then sure as hell can Met Life, Aegon et al. Yes the product does have a place and it will be right for some clients but counter party risk does have to be considered alongside all of the other factors.

  8. If its right for the client then you recommend it, if it is not, you don’t, it no more complicated than this, after all its our job to consider the need, aims and objectives and do our level best to fulfill them

    I think Lang Cat is wrong to suggest we dismiss them (some may but not all) its a bit of a broad brush claim !

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