In such an uncertain world, working out how best to convert a pension pot into income is one of the most complex areas of financial planning. It is made even more complicated thanks to the many behavioural and technical issues to consider. So how do advisers work out the advice they give to clients?
I attended an excellent conference on exchange-traded funds recently and was struck by something said by one of the speakers. He said, instead of debating active versus passive investments, it might be better to talk about the difference between rules-based decisions and those made with discretion.
Applying this to retirement income advice, I see a parallel. How many advisers use their discretion when making a recommendation and how many follow a rules-based process?
A good example of discretion is where an adviser takes the view clients with larger funds are better served with drawdown than annuities and will arrange the plan on their preferred platform using a model portfolio. One of advisers’ many strengths is they research the market and use their skills to identify the best solutions. With this in mind, discretion can be a very positive thing.
The other approach involves an adviser analysing the client’s retirement objectives and using a number of simple rules to determine the most suitable solution. An example of one of these rules is that the amount of guaranteed income needed over and above the state pension and any defined benefits should be secured by a lifetime annuity. Another is the 4 per cent rule used when calculating the level of sustainable income from drawdown.
I have my own three golden rules:
- Clients should only consider taking risk with retirement income if they have other sources of income or capital to fall back on if needed.
- Clients must understand relevant risks and the impact on their income should the market crash.
- All relevant alternative options should be considered.
Clients should not be given a black and white choice between annuities and drawdown. Good advice involves discretion, underpinned by a rules-based process.
Billy Burrows is director at Retirement IQ and adviser at Better Retirement