Following the Budget announcements, I am trying to get my mind around the potential disconnect between some of the future client behaviour we might see and what will constitute good advice from a specialist retirement adviser.
Take the concepts of tax-efficient income planning and sustainable income. A competent adviser would talk to their clients about both these concepts and point out some obvious but very important planning matters.
For example, it does not normally make sense to take money out of a tax-privileged environment and pay significant amounts of tax on income or capital that is not required. Also, a good adviser would discuss the prudent level of income that should be taken from a drawdown arrangement, that is, what is a sustainable level of income.
Clearly, some people will have a need for capital and therefore in some cases it might make sense to pay a large amount of tax to withdraw what they want but for many people it will still be sensible to use their pension to pay a regular income rather than take a lump sum. In the US, where many more middle-income people take systematic withdrawals, advisers spend a lot of time designing investment portfolios suitable for income withdrawals of about 4 or 5 per cent of the capital value. This is a far cry from 150 per cent of GAD.
An income is sustainable when it can be maintained at a certain rate or level and there are two things to consider – maintaining the absolute level and maintaining the real value.
A guaranteed, level annuity will maintain the absolute level of income but over time the spending power (real value) of this annuity will be reduce as inflation takes effect. An investment-linked annuity or pension drawdown policy does not necessarily produce an income that is maintained at the same level because it will rise or fall depending on future investment returns and other factors. One of the objectives of these policies is to provide an income sustainable in real terms but there is obviously the risk that the income could be lower, not higher in the future.
The hope is that with near total flexibility at retirement, clients will want to discuss their options before rushing off to do something that might not be in their best interests. Annuities will continue to be an important option for those who are looking for both tax-efficient income and sustainable income.
The Government plans free and impartial face-to-face guidance on the range of options available to people at retirement but many are sceptical of this because it is simply not practical or affordable.
There will clearly be need for specialist retirement consultants to explain and discuss complex options so the industry needs to get their heads together to work out how this will be done.
Billy Burrows is head of business development at Annuity Line