Andrew Tully: Pension freedoms product innovation is taking shape


There was little evidence in April to back up the Government’s belief the pension freedom changes would drive product innovation in the retirement market. But now, more than six months on, innovation is starting to take shape. The new solutions appearing are primarily a blend of annuities and drawdown designed to help people make the most of their newfound freedom.

Traditionally, people tended to choose between the flexibility and control of income drawdown, and the guaranteed income for life provided by an annuity. The option of combining a drawdown and annuity has always been available, although it was rarely used for pots of £250,000 and below. The difference now is that these can be offered within one tax-advantaged drawdown wrapper rather than as two separate products.

Although some people may prefer separate solutions, it is important to consider the benefits of combining annuities and drawdown in one wrapper: benefits that two separate products cannot deliver.

Uniting these two elements inside a drawdown wrapper means people can simply choose to invest some or all of their drawdown funds in an annuity.

This structure means clients can reduce or even stop the income they receive from the annuity at any time. Any surplus annuity income is reinvested within the drawdown element, to be used  at a later date.

As it stays within the pension wrapper no tax is payable until it is withdrawn. And at a later date the client can choose to start receiving some or all of the annuity income again. This gives flexibility and control to adapt retirement income to suit a client’s individual circumstances and their changing needs as they navigate their way through later life.

There is also much more control and flexibility when the client dies. Drawdown allows benefits to be cascaded tax-efficiently down through generations. Under annuities, death benefits are paid immediately following death, with no opportunity for tax planning. The new blended solutions allow tax control over all death benefits.

Annuity death benefits, such as guarantees up to 30 years and value protection, are paid into the beneficiary’s drawdown account, along with the remaining drawdown fund. Money can then be withdrawn by the beneficiary when and if it suits. This allows annuity death benefits to be passed to family in a tax-efficient way that is not possible within a standalone annuity.

A blend also simplifies the process of buying further tranches of annuity in the future. This allows people to start off fully or mostly in drawdown in their younger years, then gradually buy slices of annuity as they get older and want less investment risk.

For those who want a guaranteed income, this solution offers all the benefits of an annuity but with the added benefits of income flexibility and superior death benefits. For those who value the flexibility of drawdown, it offers all of that flexibility but the option to include some guaranteed income now or in future.

Andrew Tully is pensions technical director at Retirement Advantage