However, with more choice comes more riskand more responsibilityfor advisers. For many investors, an annuity remains the best option but, with a growing number of semi-retirees – people who continue to work part-time after their official retirement age – income drawdown andthe third-way annuity alternatives may bemore suitable.
Income drawdown isone option which has grown from strength to strength in the last decade. In the mid 1990s, drawdown was being touted as another potential pension misselling scandal in the making but the implementation of maximum drawdown limits has helped ensure that investors are more protected from the potential dangers ofseeing their pensionfund erode entirely.
Income drawdown allows the investorto avoid purchasingan annuity until as lateas age 75 by leaving their pension fund investedin a range of assets.
Providers are jostlingto win ever increasing amount of income drawdown business by launching enhanced versions of income drawdown. Last autumn, Prudential launchedthe Prudential Flexible Retirement Plan which includes an income drawdown option for personal pension investors. Prudential claims the plan’s holistic charging structure allows clients to consolidate their pension savings in one place but havethe option of being ableto move into income drawdown as they move into retirement.
But Bestinvest senior consultant Tim Stalkartt, says income drawdownis still essentially an option for investors with a bigger pension fund.
He says: “The thing with income drawdown is that it is still more risky than an conventional annuity so it is really only appropriate for investors who can afford to take the risk of leaving their money invested.” Stalkartt insists that income drawdown should only be sold to investors with a fund of £500,00 or more.
He says: “Someone with £250,000 or more could also use income drawdown but, for that kind ofinvestor, it is a good ideaif they are semi-retired,for example, someonewho is scaling down their work rather than stopping work entirely.”
Under income drawdown, an investor can choose to take out all their tax-free cash at the start without taking an income.
Stalkartt says: “This kind of cash allows the investor to settle commitments such as a mortgage but still defer taking an income.”
The rest of the moneycan stay invested withinthe pension fund untilage 75 when they have to take out an alternatively secured pension. If they die before 75 the value of their fund, minus a tax charge, can be passed to their beneficiaries.
Stalkartt points out that this can offer greater value than an annuity, which often does not allow the investor to pass the capital value of the fund to any beneficiaries on the investor’s death.
In the meantime, the investor can choose to take out between nothing and up to 120 per cent of the Government Actuary Department’s maximum limits. These limits are set at the rate paid for a single life annuity. “For example, if the GAD rate for a single life annuity is 6 per cent, then, on the 120 per cent GAD rate, an investor can take as much as 7.2 percent out of their fund,”says Stalkartt.
These withdrawals can be made every five years and are subject to review.
“Some people think the limit is still fairly low butif the investor has a large fund, for example £1m, they are taking out £250,000 tax-free cash and leaving £750,000 invested, then 7.2 per cent of that does not seem quiteso unreasonable,”adds Stalkartt.
Investors who have not accumulated such big pension funds arealso being wooed with hybrid products.
Sitting in between annuities and income drawdown are the third-way products, such as Lincoln Retirement Income’s Lincolni2Live, Living Time and Hartford Life’s Guaranteed Retirement Income Plan. All these plans offer the option of reinvestment plus guaranteed income for life.
Lincoln Retirement Income head of distribution Will Hale says investor demand for a product that allows some certainty of income plus the ability to stay invested will boost the popularity of these plans.
Lincolni2Live offers three products under one umbrella which includesa pension fund,a drawdown option anda annuity plan. Living Time, which was launched in conjunction with AIG Life, is an investment withina drawdown plan which provides guaranteed income payments fora set number of yearsor until the investor reaches age 75.
At the end of the period, there will be a guaranteed maturity payout which can be reinvested in a draw-down plan, or an altern-atively secured pensionif past the age of 75,or an annuity.
Hartford Life’s offeringis Hartford Platinum, which includes an optional feature, the Guaranteed Retirement Income Plan which allows retireesto draw a minimum guaranteed income forthe rest of their lives.
The guarantee claims to gives investors the abilityto grow their pension income by investing ina range of investment funds, guaranteeing its value and potentially locking in up to the first 10 per cent of investment gains each year.
Hale admits that these annuity and income drawdown hybrid plans do not come cheap. Investors still have to be prepared to pay for these guarantees.
“It is just that they also allow the investor the option of beating inflation,” he explains.
For example, an investor taking out a Lincolni2Live will have to pay out a feeof 95 basis points a yearon the part of the fundthat is guaranteed.
Hale says: “There is no such thing as a free lunch. With plans like ours,you get the both of both worlds but, like all good products, you have to pay.”
However, Stalkartt says for some investors, there is only one option: “Do not dismiss annuities entirely. If you are 65 and you live until 87, the chancesare that the insurancecompany will lose outand the investor will win.”