Annuity or Drawdown – That is the question
Annuities are old hat and drawdown is the new default. Simple, or is it so simple?
I have argued for a long time that there is strong case for annuities and a strong case for drawdown and the question for most people is what combination of each they should have. One of the many positive aspects of the new pension freedoms is that advisers and their clients should no longer be faced with the black and white choice between an annuity and drawdown, and instead should consider a combination of solutions.
100 plus days into the new pension freedoms and I am not sure how far we have moved down the road to blended solutions. Some insurance companies such as LV have made good progress and support advisers with on-line tools to help them understand the case for blended solutions. Other companies are nearing the time when they will launch new products to the market that will offer a combination of annuities and drawdown.
So will blended solution become the new norm? I hope so but before we reach this position there are three things the industry must do:
- Educate individuals about the advantages of not putting all of their eggs in one basket
- Help advisers get the tools and skills to put blended solutions at the heart of their advice process
- Encourage providers to innovate and develop new solutions
Everybody talks about educating customers but most miss the point that with pensions it is not just about telling people about their options it is also about engagement. Confucius he say “Tell me something I will forget, show be something I will understand it but involve me I will understand it”. If rule number one is that people should not invest in things they don’t understand it is imperative they are involved to the extent needed to ensure they do understand. It goes without saying that the best form of engagement is a customer friendly advice process and I struggle to see how robo-advice can provide the right level of client engagement.
When I did some adviser roadshows earlier in the year I presented around the theme ‘the skills of the trade’ and these included; foresight, relationship skills, risk management, product knowledge, technical expertise and tax. All of these skills are needed if advisers are to recommend the best solutions for their clients. If I was to pick just one of these it would be risk management and I would explore the question; ‘why do many advisers and their clients either take too little risk or too much risk’. The concept of taking too much risk is easy to understand but the opposite risk of taking too little risk and being locked into low yielding assets for a lifetime is not sufficiently discussed. This begs the question ‘what is the optimum level of risk’ and this is where a combination of annuities and drawdown can help.
The purist in me asks why do we need combination products when it is possible to separately purchase the best annuity and invest in the most appropriate drawdown. On the other hand the realist in me says that just as with fixed term income plans a packaged solution for clients with modest sized pension pots is the best solution.
The day when everybody gets the optimum retirement income solution may be a long way away, but a move towards blended solutions should take us one step nearer to getting better solutions for more people.