Why go to a non-advised broker when you can get expert advice for half the price?
It has been 16 months since
I started advising clients again after a break of four years. Obviously, much has changed since pension freedoms, not least that annuities are less popular and drawdown has become the new default at retirement.
I have written a lot about combining annuities and drawdown, and recognising how objectives change with age, so I was delighted to be able to put this all together in an advice case recently.
Someone I had spoken to about annuities almost 10 years ago contacted me to say he wanted to purchase one from his drawdown plan, which he had arranged without advice. He was just over 70 years old and in good health.
The reason for his approach was concern about the outlook for global equities. He had already converted some of his drawdown investments into cash.
First, I considered whether it made sense to defer an annuity purchase for several months, or even years, considering rates are so low.
To increase the annuity purchasing power of a pension pot, the pension must increase by more than the implied interest rate for the annuity. If the underlying interest of the annuity is 2 per cent, the fund must grow by at least 2 per cent to maintain the annuity purchase power. At the moment, the interest on cash is negligible.
The fund must also grow by a little more to compensate for mortality drag. If bond yields rise, the underlying interest rate on the annuity will rise and, therefore, the fund will need to grow less.
The next step was to work out whether there was a better option than an annuity. Here, I analysed a five-year fixed term one. The maths suggested annuity rates would need to be about 5 per cent higher in five years’ time to maintain the annuity spending power. We agreed this was not unrealistic.
I had established it made sense to purchase the annuity sooner rather than later and there was a case for a fixed-term income plan, so it was logical to look at a combination of the two. It was time to research the market.
So, what seems like a simple question at the outset often requires complex analysis. This is what advisers are trained to do, but the same is not true of non-advised brokers.
The icing on the cake here was that the fee for advice was about half the commission quoted by a non-advised broker. Why go to a non-advised broker when you can get expert advice for half the price?
William Burrows is retirement director at Better Retirement