The last thing that Peter wanted was another deadline but - lo and behold - he was already starting to get some reaction from drawdown clients who wanted to consider the 20% uplift in GAD rates effective from 26th March 2013. Indeed Peter’s next meeting that day was a potential new client looking at drawdown from early April.
David was almost 60 and was thinking of retirement and starting to draw from his pensions. His main pension fund was approximately £300,000 and he had a few other savings in ISAs. His wife had similar resources.
David sat opposite Peter and the meeting began.
“I need to start drawing an income from my pension and from what I understand it is a choice between an annuity and an income drawdown plan. I want the maximum income I can achieve and I understand that, with income drawdown, the maximum income available has just increased.”
Peter had produced a few rough numbers anticipating this sort of discussion.
“David, at 60 years, and based on April GAD rates you could draw something like £4,900 pa for each £100,000 in your pension. With the 20% uplift this will become £5,880 pa. In comparison, you could buy a single life annuity and receive something like £5,070 pa.”
Peter carried on “Taking the maximum income level is a personal decision. Income drawdown is an investment product and future income will depend on how your portfolio is managed and how it performs. You need to understand the link between investment performance with any growth or loss and how this will affect your future income. We will need to think about your attitude to risk.
“Let’s look at some of the details. As a 60 year old man your current life expectancy is another 23 years and 9 months. This means that your savings will need to last at least this long - and possibly longer. If you buy the annuity, then the amount will be guaranteed for the rest of your life but with much less flexibility.
“As you can see from the figures quoted, maximum income drawdown would mean you having to make an investment return of almost 6% per annum to avoid eating into your capital before product charges and my advice costs. As an example if all the other costs came to say 2% then we would ideally want an investment return of 8% pa.
“If you want to proceed then, after determining your attitude to risk, we will work out how much income you need and the parameters within which we can invest. We will also look at your capacity for loss.
“My starting point, however, will be to determine the income figure that you think you cannot survive without. We will look at your debts, liabilities and your plans going forward, as well as any legacy issues.
“If your risk profile is as I think, my suggestion will be not to take the full 120% of GAD but to look at the natural yield from your drawdown plan and use this as income, supplemented to the required level with your other investments. The prognosis for gilt yields does not look positive and we will maintain a bit of a cushion for the future.”
Peter concluded “I read a report recently by HSBC on Retirement from which I’ll leave you with a couple of thoughts. Firstly: ’People on average expect their retirement to last for 18 years, but their retirement savings to last for only 10 years, running out just over half way through retirement.’ Secondly: ‘In order to sustain a comfortable standard of living in retirement, people say they would need 78% of current income; which is far higher than is likely to be achieved.’”
Managing expectations is key when planning a retirement solution.
Mike Morrison
Head of Platform Marketing, AJ Bell