Colin Simmons, Prudential Business Development Manager, writes about greater income stability through blending solutions with a Prudential Trustee Investment Plan (TIP).
With the introduction of Pensions Freedom and choice, more advisers have been focusing on, and recommending income drawdown products for retirees. However, the flexibility provided by no limits for drawdown income creates a problem for advisers in determining what is a sustainable withdrawal for clients. Sustainability of income is a concern for clients, advisers and the regulator alike.
There are a number of risks that clients need to avoid. Insufficient returns, sequence of return risk, taking too much income and timing risk being the main ones. All of which are exaggerated by market volatility. Some of the solutions available to offset these drawdown risks are listed below, alongside their limitations.
|Draw from cash||When interest rates were higher this was a simple way to protect from reverse pound cost averaging in the early years. Interest rates today make this unattractive.|
Take the natural income from the fund
|This is an option, though funds must be matched to the clients’ attitude to risk and also the actual income paid may not reflect clients’ requirements.|
|Some providers offer income guarantees. The costs of these guarantees must be weighed against the peace of mind of never running out of money. Prudential offers guarantees on its Protected PruFund funds.|
Safe withdrawal rate
|Much has been written about safe withdrawal rates. Every client is different, so how can there be a one size fits all for clients? If these are based on historical data are returns in the future going to replicate the past?|
Time the market, take income from the right assets at the right time
|Costs of advice/process prohibitive for some investors. Size of portfolios and depth of asset diversification could be difficult for some clients.|
Smoothing of returns
May lag performance in a strong rising market, will deliver the return of the underlying assets over the normal and acceptable investment horizon.
Smoothing returns and asset diversification assists with providing potentially more stable returns for investors. This is especially important for clients looking to reduce risk as they approach retirement or wanting additional security when they start drawing an income later in life. Allowing them to potentially maintain a more sustainable income for their future.
The PruFund range of funds aims to grow your client’s money over the medium to long term (5 to 10 years or more), whilst protecting them from some of the short term ups and downs of direct stock market investments by using an established smoothing process. This means that while they won’t benefit from the full upside of any potential stock market rises they won’t suffer from the full effects of any downfalls either.
Using Prudential’s TIP allows investors and advisers to choose PruFund as a blending solution providing the benefits of a smoothed investment return alongside other asset classes without having to move away from a flexible pension wrapper such as a SIPP.
So what is a TIP and why are people using them?
A TIP is a single premium investment for trustees of UK registered pension schemes. It offers investors in pension schemes, usually SIPPs or SSASs, access to a range of wider investments that might not be available from a traditional provider.
Where are they being used with Prudential?
The Prudential TIP will allow investors access to a variety of pension funds including the range of PruFunds, whilst allowing the investor to remain in their current plan without the need to enforce a pension switch or transfer. The following sub headings explore why PruFund is being used so widely.
Alternative to cash – Cash within a pension wrapper helps diversify a portfolio by providing low risk returns compared to other assets. However, due to current low interest rates, cash is providing minimal returns. Therefore, having a well-diversified and ‘smoothed’ investment offers the potential for higher returns assuming the client is prepared to accept some risk.
Income producer – Traditional drawdown portfolios weighted their asset allocations heavily towards cash, thus allowing income withdrawals to come from the cash as a stable alternative investment to the rest of the portfolio. This would avoid the risk of cashing in units at the wrong time from other asset classes. The difficulty with this strategy is cash has very low returns at present. However, advisers have the option of considering ‘smoothed’ investments to provide income for clients. By investing in a Prudential TIP investors can withdraw up to 7.5% of the original amount invested each year, though clearly withdrawals at this level are likely to reduce capital. Prudential provides access to a Retirement Modeller on our adviser website, which allows scenarios to be modelled for clients.
Portfolio stabiliser – Advisers and investors are looking to provide diversification to portfolios for clients. Having a well-managed, highly-diversified investment that has its returns smoothed means PruFund can often offer an alternative that is uncorrelated to clients other investments.
Guarantees & Death Benefits – The most valuable feature of a pension to some investors is the ability to guarantee the value of their plan. Certain PruFund funds, at an extra cost, can allow investors peace of mind that they can opt to choose a date in the future that the capital will be guaranteed and maintain the flexibility of a SIPP contract. These provide a guarantee that your investment will be worth at least a minimum amount at the end of the guarantee term.
For others it’s having the ability to pass on their pension value as a death benefit legacy. As we know legacy planning is a valuable option for clients when considering pension transfers. Investing in a TIP through a modern SIPP contract allows clients to still provide flexible death benefit options to their beneficiaries.
So in summary, if you have clients invested in SSAS or SIPPs and they are looking to…
- Reduce exposure to volatility
- Take income from their pensions
- Pass on death benefits
- Have a guarantee
For further information take a look at PruAdviser.
The PruFund range of funds all invest in Prudential’s With-Profits Fund, which is one of the largest with-profits funds in the UK. However, there are differences across the range of PruFund funds in their objectives and mix of assets, and how PruFund delivers returns to investors when compared to other With-Profits business, which means the returns received by investors will vary by fund choice.
Please remember that past performance is not a reliable indicator of future performance.
The value of an investment can go down as well as up. So your clients could get back less than they put in. This article is just for UK Advisers – please don’t show it to your clients.