It’s well understood that pension freedoms have changed the retirement income landscape.
It’s been over three years since the reforms were introduced, and we are beginning to understand their impact.
For a start, we know people are taking their pension benefits in a different way, with many withdrawing the whole amount. The latest FCA statistics show a total of 137,777 pension plans were cashed in between October 2017 and March 2018. A further 90,504 pension plans entered drawdown in the same period, three times the number buying an annuity.
We also know the range of people choosing drawdown has expanded – to include those who have smaller pensions pots as well as those who are younger in age.
Different cohorts are approaching retirement with different needs, circumstances and backgrounds. Many of these people don’t have the luxury of a defined benefit scheme to fall back on, putting a different type of pressure on their drawdown pot to provide a retirement income for life.
There has always been a strong realisation among the adviser community that the secret to designing a drawdown strategy is to review and adapt the plan on a regular basis. With such a diverse range of clients using drawdown, it stands to reason that no two drawdown plans can be the same.
Some will want their drawdown plan to keep on providing income for 30 or even 40 years. Some may want to exhaust the plan after a few years, before falling back on other sources of income.
Importantly, many will want to change how and when they use their retirement income during their retirement. After all, that’s what drawdown is best used for – to give clients the flexibility to change their retirement income to reflect their changing lives.
It therefore seems incongruous that a drawdown plan can be set at the start of a retirement, possibly with a safe withdrawal rate as its bedrock, on the assumption that no further changes are needed in future years. Instead, the only way to make sure the drawdown plan works to the best advantage of the client is to review, review, review.
However, as the number of people and the type of people entering drawdown change, advisers are having to adapt their business model to reflect drawdown as the new normal.
The number of drawdown reviews an adviser has to accommodate is ramping up, as advisers acquire more and more drawdown clients. The nature of the review is also changing, as advisers adapt the process to reflect the freedom and flexibility the reforms provide.
Reaching age 75 has now taken on a new significance. Advisers and their clients have key decisions to make, given the taxation of death benefits changes at this point. The threat of an additional benefit crystallisation event for drawdown also looms, meaning the possibility of a second lifetime allowance charge.
What’s more, the client’s attitude to how their assets are managed may also change with time. They may become more cautious regarding investment decisions, or they may become less engaged often because of failing good health.
Finally, the tools advisers use in drawdown reviews have also changed significantly in recent years, with a greater emphasis on more sophisticated cashflow modelling.
The decision on whether a client should enter drawdown is an important one. But as advisers know, this is only the start of the road.
The drawdown review has taken on more prominence as advisers use a mixture of the information and tools available to them, all this in the full glare of the FCA taking a greater interest in this area.
Advisers need to make sure their business model includes a robust drawdown review process for what is likely to be a greater number of clients.