“But perhaps the biggest plus for investors is the fact it is reviewable. Regular product and income reviews are provided to ensure that the best available rate is always received and these assessments mean clients can benefit fully from age or health related rate increases.”
Fixed-term annuities are also a possibility. Technically written under drawdown rules, they allow clients to take a guaranteed income from their pension pot for set period of time. At maturity, they can then review their options, for example, they may have become eligible for an enhanced annuity.
Some say that demand for different types of annuity products is likely to rise as clients seek more income and advisers look for creative ways to deliver that. However, not everybody buys into the idea of alternative products.
“We have not seen any real demand for ‘third way’ retirement income products,” says Martin Bamford, managing director of Informed Choice advisers. “This remains a fairly immature market in the UK and in most cases clients are better served by the security of an annuity or the investment exposure of income drawdown.
“Comparing third-way products with each other is close to impossible, as is understanding the costs of any associated guarantees.”
Drawing down
For clients with larger pension pots, income drawdown is likely to be on the table. It allows clients to draw a level of income that they choose – up to 120 per cent of Gad as of March this year, up from 100 per cent previously – and review it over time. It allows clients and advisers to retain investment control and can be useful for tax planning.
“One of the reasons advisers say their clients use income drawdown is the ability they have to turn the income tap on and off,” says Steve Lewis, head of distribution of retirement products at LV=.
“For those clients that continue to work this is extremely useful as it means that they can access their fund, but can drip feed the income so they don’t end up in a higher tax bracket.”
The death benefits of drawdown add to its appeal. With an annuity, the fund is handed over to the insurer for life and cannot be passed on, except when a joint annuity has been set up. For income drawdown, a beneficiary can inherit the remaining pot minus a 55 per cent tax charge; they can continue an income drawdown contract; or they can convert the pot into an annuity.
Capped drawdown is most common, where the income is at a set rate. Also available are phased drawdown – which allows the pot to be crystallised in stages – and flexible drawdown. This latter allows clients to draw any level of income they want, but they must first prove a minimum income of £20,000 from elsewhere.
