There is a real challenge to new drawdown. The new drawdown structures are now embedded and we are getting used to some of the differences between the new world of drawdown and the old world of USP. I think there are some real challenges with the drawdown concept and advisers and clients will need to maintain a high understanding.
The fact that in USP a decision was forced upon the individual at 75 about annuitisation was probably no bad thing as the client was put into a position where they needed to listen to advice and make a decision to annuitise or not. Let us rem-ember that you did not have to annuitise. The removal of compulsory annuitisation is in danger therefore of removing this process of review simply because it does not have to be done.
You must review clients in drawdown every year from an investment and income needs point of view and in addition it is very important to conduct a more fundamental review of the client circumstances every three years. At this point, the fundamental need for drawdown should also be reviewed as if this were a new piece of advice and decisions were being made again.
As clients move past 75, there is now the need to review the GAD rate every year. This is interesting in itself as if we look past 75 in the GAD income tables, we can see how rates will change quite dramatically. The need for a fundamental review beyond 75 every year rather than every three years is very clear.
There are several different types of client in drawdown and the first that is often described to me is the “conscientious objector”. This is the person who says: “I am never going to give my money to an insurance company.” The review each year then may only be to confirm that the client views are still so strong. For many others, though, the decision to stay in drawdown may be influenced by a whole range of other factors.
Maintaining your eye on ann-uity rates is one thing as there will be an optimum time to buy but in the new annuity market, ensuring that you have a constant awareness of your client’s health will be even more important.If annuity rates rise and your client’s health takes a turn for the worse, your services should be called upon to test and see if now is the right time to convert.
The adviser proposition for clients in drawdown will need to be very clear to manage expectations from the client, risk to your business and provide the most effective and cost-efficient solution to the client. There are some big traps that have appeared and without careful planning, both the client and adviser could step into them.
If you would like to reserve a copy of our new paper, The Challenge of Drawdown, email email@example.com. ’There are some big traps and without careful planning, both the client and adviser could step into them’
Steve Lewis, Managing director, The Retirement Partnership