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Is guaranteed drawdown making a comeback among advisers?

Michael Klimes asks if guaranteed drawdown that stalled few years ago could return in a big way

New players aim to win over advice community after charge fears

Since pension freedoms put an end to compulsory annuitisation, the market has been crying out for products that give a client flexibility over their savings in drawdown, but also provide a guaranteed income.

This sense of urgency has grown as we have moved further on from the start of the freedoms, with consumers presented with the temptation to spend their money unwisely at every turn. The possibility of a viable product emerging has arguably reduced over time though, with several providers of guaranteed drawdown products leaving the market in recent years.

Metlife, Aegon and Axa used to offer products known as unit-linked guarantees that combined the benefits of pension drawdown, leaving a client invested in the market, and an annuity, which provides a guaranteed level of income until death. These started to come on to the market around 2006, when a provider would normally purchase a guarantee underwritten through derivatives from a third party.

But the financial crisis undermined the derivative aspect of the model, and providers found it hard to convince advisers that their clients should pay higher charges for guaranteed drawdown products.

Apart from the expensive nature of guaranteed drawdown, advisers also complained these products were opaque and difficult to use.

Yet while some offerings fell by the wayside, commentators say there is still a need for a product which marries flexibility and security. Is the time right for a resurgence?

New player enters

Earlier this week, Just Group announced it had teamed up with Novia to launch a guaranteed income proposition within a Sipp wrapper on Novia’s platform.

Both Novia and Just say the solution provides advisers and their clients with greater flexibility and convenience than traditional off-platform annuities.

It is designed specifically for the platform, enabling an adviser to implement a flexible investment strategy within the Sipp.

The firms say using the guaranteed solution inside the Sipp enables an adviser to minimise income and inheritance tax liabilities on behalf of their clients.

A death benefit starting at 75 per cent of the initial investment is provided in the early years and paid as a lump sum into a client’s Sipp cash account, providing added security for investors’ dependants.

The solution also provides a cash-in value in the early years, should a change in the client’s circumstances require it.

Just Group director Stephen Lowe believes the proposition is exactly what the market needs to shake things up and says: “The client’s need for a guaranteed income product has not diminished with pension freedoms, but enabling the adviser to do all the administration under one roof through their existing platform makes life easier.

“It is like we have deconstructed a traditional annuity and we have rebuilt it from scratch so it works for advisers in the world of platforms.”

These are big claims but what do others make of this product, and could it lead to a new dawn for guaranteed drawdown?

Expert view

More products needed to win over advisers

Following the pension freedoms, there has been a marked shift away from annuities towards the flexibility offered by drawdown. While annuities offer a guaranteed income for life, they remove all future flexibility and in today’s economic conditions, they offer an income which is low compared to historic rates and is consequently considered by some as poor value.

Nonetheless, many individuals will need some form of guaranteed income in retirement and in future, as fewer will have a defined benefit pension to supplement their state pension. Aegon previously offered a drawdown with guarantees product that allowed individuals to combine flexibility with their chosen level of guaranteed income. While well received, its uniqueness may have stood in the way of its wider use and so we closed it to new business.

It may require a number of providers to offer this type of solution for it to gain widespread acceptance among advisers and their compliance departments.

Steve Cameron is pensions director at Aegon

Same challenges, new products

Canada Life technical director Andrew Tully says his firm offers a similar proposition to Just and Novia.

Its Retirement Account proposition has been running for the past three years and offers advised clients drawdown, an annuity and untouched pension savings under one personal pension contract.

Tully points out there are key differences between the previous wave of guaranteed drawdown products that started in the mid-2000s and the ones emerging now.

The main contrast is the intended reduction in cost and complexity from enabling the adviser to manage a client’s money in one place.

Tully says: “We offer an annuity within a drawdown wrapper that is a much more cost-effective way of providing a guarantee. The sourcing of derivatives in the old products would have often involved buying from a third party.

“There was a counterparty risk and you had to ask [in the context of the 2008 financial crisis] if that company would still be there to underwrite risk [for any policies].

“To give an example, the Metlife charge was about 3 per cent annually for the whole product and so it became challenging for an adviser to suggest selling this product to the client because the charge was high.

“In our proposition, we are not having to guarantee the risk using third parties that can make the product expensive.

“It is simple as well, because your average customer does not understand hedging and derivatives, while they understand the concept of an annuity.”

Does Tully think the product from Just and Novia will take off with advisers? He says: “What we have seen from pension freedoms is a move towards drawdown but, nonetheless, £4.3bn went into annuities last year.

“Historically, annuities have had the downside of poor benefits and lack of flexibility on the income. Holding an annuity inside a drawdown wrapper gets around some of those issues.

“So what Just and Novia are doing is more likely to take off with advisers and be cost-effective.”

Tully adds that Canada Life is aiming to enhance its Retirement Account proposition significantly throughout the year.

Adviser view

Stephen Bridges
IFA, Antrams Financial Services

The issue with drawdown is that there is a lot of focus on the start of the process during the first three to five years of a client’s journey. But there is no doubt, as people get older, their risk profile changes. That is the area of the market where these products, like Novia’s and Just’s proposition, will be of interest.

The ability to hive off a bit of the fund within the Sipp and not take it out with a guarantee has some merit.

We are still in a low interest rate environment and this solution is a good way to de-risk a client’s portfolio while keeping growth in place for them.

Adviser attitudes

Although one can welcome new propositions and understand the case for a new wave of guaranteed drawdown products, it remains to be seen whether advisers will be keen on them.

Independent consultant Malcolm Kerr says: “The market needs new propositions to meet the needs of consumers in drawdown.

“This [Novia and Just] solution sounds interesting and it is good to see that it works on a platform. That has been a serious challenge in the past for some innovative solutions.”

But Kerr adds that his past experience makes him sceptical about whether propositions such as this will catch on.

He says: “Based on the work I have done in this space over the years and a session I ran on the topic at last year’s Money Marketing Retirement Summit, my guess is that Novia and Just might struggle to gain traction. At the summit, a common response from the audience was ‘we don’t need any more propositions’.

“When asked why innovative propositions had not taken off, actual responses included ‘too expensive’, ‘I don’t have the time to look at these things’, ‘I can create portfolios that mitigate these risks’ and, I quote, ‘too complicated’.

“This last response was a bit of a surprise given the huge flows of client money into Gars and PruFund, which seem to me to be very complex products indeed.

“At the start of the session, I asked the audience to decipher some acronyms. All the hands went up for the first question, which was the letters ‘RDR’. One hand went up for the last question, which was about constant proportion portfolio insurance [a mechanism to underpin guaranteed drawdown].”

The Lang Cat consulting director Mike Barrett argues the success or failure of any new guaranteed drawdown products with advisers will come down to the benefits set against the costs of them.

He says: “The history of this is a good place to start and there are a few advisers who have dabbled in this market. When we asked them why they did not go into these products, they cited cost and lack of transparency.

“In theory, having a guaranteed drawdown solution on platforms allows you as the adviser to direct income from multiple sources to a cash account, which is certainly easier to manage. The downside is you are likely to have the platform charge and so the adviser must look at how it affects the client’s retirement over the long term through pound cost ravaging.

“Any provider will not have to go very far in this space to get a sceptical reaction from advisers. If advisers cannot get information easily and cannot understand it, they will not recommend it to the client.”

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. “Since pension freedoms put an end to compulsory annuitisation”. I do wish journalists would not keep perpetuating this myth. I expect this sort of comment in the Daily Mail, not one of the “pinks”.

    According to my recollection drawdown has been around since 1995!

  2. A hybrid retirement product (annuity + drawdown on the same platform) is not guaranteed drawdown.

    Guaranteed drawdown is the sort of product MetLife used to offer (at eye-bleeding expense). A hybrid drawdown is just two different kinds of policies with some reduced administration. (Of rather dubious value – lifetime annuities don’t require any ongoing administration.)

    A death benefit guarantee of 75% of the initial investment is virtually worthless. Even 100% equity portfolios will only very rarely fall below 25% of the initial value. And products like this typically heavily restrict the equity content to reduce the cost of the guarantee for the insurer – do correct me if this isn’t the case with Just/Novia.

    Assuming the equity content is restricted to 50-60% or lower as is typical with guaranteed drawdown products, there’s a very significant chance that the portfolio will never fall below 75% of the initial value, even in 2001 and 2008 style events.

    • Sascha, you are absolutely correct it is not a guaranteed drawdown product, it is the creation of the abilty of any existing SIPP (in this case Novia’s SIPP) to use some of its existing asset value to purchase a specifically designed underwritten annuity contract. The 75% relates to the death benefit of the annuity purchased, not the entire SIPP. The balance of the SIPP portfolio can continue to be invested however the adviser wishes, although the presence of the annuity which guarantees to pay income (within the SIPP) throughout life, may actually permit higher equity content. Hope that clarifies.

  3. Julian Stevens 1st March 2019 at 1:56 pm

    But do products of this type actually provide MORE income than the certainty of an annuity? And how many people who’ve chosen or been advised to use IDD instead of a guaranteed-for-life annuity have seen nett investment growth that has enabled them to increase the level of income being drawn? There may be a few but that has to be set against the risk of things going the other way, which means they’ll have needed to reduce the level of income being drawn to avoid irrecoverable erosion of capital.

    IDD is not, as all too many people seem to believe, some sort of magic recipe for extracting a quart from a pint pot.

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