As baby boomers start to reach retirement age, there will be an explosion in demand for what are known as at-retirement products.
Do not forget that, in the post-war era, this generation has driven most of the advances in finance which we currently enjoy. They also hold a huge proportion of the country's assets, which they will be looking to realise as they approach retirement.
As the first of them start to consider their “third age”, a great deal of attention is being paid to the structure of retirement vehicles. Perhaps unsurprisingly, the normal course of annuity purchase has not seemed too appealing.
Income drawdown has seen a rapid rise in popularity in recent years. From a baseline of 11,000 policies sold in 1996, after launch in 1995, the market rose to 15,000 policies in 2001.
But stockmarket volatility has led to some unpleasant surprises at the second round of triennial reviews which are starting to take place now. This has resulted in some unpleasant stories in the press, calling into question just how good an idea drawdown is.
We believe that income drawdown – particularly phased income drawdown – has a lot to offer the right client. Clients need to be prepared for a variable income based on investment returns rather than fixed payouts. Hence, investment selection is critical.
Research shows that many IFAs seem to favour with-profits or managed funds, both of which are arguably unsuitable for income-drawdown schemes.
A survey in May 2002 looked at 22 companies active in the drawdown market. Of the 13 which nominated a most popular fund, 70 per cent cited their managed or with-profits fund. Why do we consider that they might be unsuitable?
Most managed funds are likely to hold a fairly high equity content – perhaps 50 per cent or more – which is generally better suited to medium or long-term strategies rather than short-term income requirements. The added complexities of with-profits may make it even less suitable than managed funds for short-term income requirements.
A well constructed non-Sipp income-drawdown portfolio would probably contain short, medium and long-term instruments which can be rebalanced at each policy anniversary, not just every triennial review.
If the provider you pick is sophisticated enough to offer vertical segmentation, you then have the flexibility to draw income purely from the asset class that you and your client agree is the most appropriate at the time. Of course, this could be an equity fund if you consider that a particular sector is overvalued and it is time to take profits.
In constructing and maintaining an active portfolio for drawdown clients – Sipp or non-Sipp – you are adding value and justifying your ongoing remuneration, either in the form of renewal commission or review fees.
In summary, income withdrawal has many potential benefits for clients, including investment choice and opportunities for phased income drawdown. Do not be put off by adverse press comment. Take the time to check if drawdown suits the needs of your client and, if it does, that they understand what they are entering into.
Construct the portfolio carefully, review it regularly and you will be laying the bedrock for a long and mutually beneficial relationship with your client.