Richer, smoother and longer-lasting. You could be forgiven for thinking I was talking about a new blend of coffee. Actually, I am talking about blended retirement income solutions fit for the 21st century.
News headlines dominated by wars, global trade disputes and economic challenges are a reminder of the unpredictable world we live in. In this environment, financial advisers must deliver solid and sustainable pension solutions that can withstand the turmoil for decades ahead.
There is increasing regulatory pressure to deliver better solutions too, prompting many financial planners and discretionary fund managers to review their decumulation options and tools.
In retirement, the primary need for the vast majority of pension savers is to generate a flow of regular income they can use to pay the bills for as long as they live. However much the retiree likes the idea of flexibility, it should never come at the price of sustainability.
Traditional drawdown has always recognised the importance of income sustainability. Typically, gilts and bonds are held to deliver predictable income, alongside equities to deliver potential growth. An example is the classic 60:40 equity-bond portfolio.
More sophisticated strategies might involve a mix of other assets such as property, private equity or precious metals along with annuities. The goal is the same — to have a solid foundation of income with some growth prospects, balancing the client’s attitude to risk with their capacity for loss.
Annuities are often seen as contradictory to drawdown strategies, but there is an increasing belief among forward-thinking advisers that they are complementary.
Platforms are increasingly offering the option of a guaranteed income producing asset (GIPA) that can be held on-platform alongside — or even replace — the traditional fixed-income component of the investment portfolio.
Our Secure Lifetime Income (SLI) solution is an example which we believe offers advantages for both advisers and clients:
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Like gilts and bonds, a GIPA can be bought in tranches within a SIPP which gives the convenience, transparency and tax-efficiency of platform investing.
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GIPAs are insulated from financial market gyrations, so help protect against sequencing and longevity risk.
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Income is usually higher from a GIPA than from traditional fixed-income assets — annuity rates incorporate a mortality credit, plus our SLI is underwritten which takes health and lifestyle into account.
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Because the GIPA can deliver a higher income in relation to each pound of pension, it can do more of the heavy lifting in terms of achieving a target income, allowing other assets to be invested more adventurously for growth or potentially even sold and spent.
Stability of income is hugely important to most retirees, giving them the confidence to spend the income their pension is generating regardless of how bad the news is. But it is natural that they want to ensure their pension is not wasted, for example, in the event of premature death.
With this in mind, one provider has just improved the death benefit options in their product offer to offer a full 100 per cent value protection feature. This ensures it returns at least 100 per cent of the sum invested, in effect a moneyback feature that guarantees the overall return is at least equal to the original premium paid.
Independent research into the potential of GIPAs as an asset class has shown this strategy can deliver higher incomes and/or higher legacy benefits than the traditional equity:bond solutions. In effect, the data shows most retirees would be better off and this advantage grows over longer retirements.
The approach smooths the impact of economic turmoil on the portfolio and is longer-lasting in the sense it cannot run dry.
But it is also smooth in the sense the product can often be seamlessly integrated with advisers’ current financial planning tools, investment models and charging models.
Richer, smoother and longer-lasting — it may not be coffee but it could be just your cup of tea.
Stephen Lowe is group communications director at retirement specialist Just Group
