Billy Burrows: What will good advice look like post-Budget?

Following the Budget announcements, I am trying to get my mind around the potential disconnect between some of the future client behaviour we might see and what will constitute good advice from a specialist retirement adviser.

Take the concepts of tax-efficient income planning and sustainable income. A competent adviser would talk to their clients about both these concepts and point out some obvious but very important planning matters.

For example, it does not normally make sense to take money out of a tax-privileged environment and pay significant amounts of tax on income or capital that is not required. Also, a good adviser would discuss the prudent level of income that should be taken from a drawdown arrangement, that is, what is a sustainable level of income.

Clearly, some people will have a need for capital and therefore in some cases it might make sense to pay a large amount of tax to withdraw what they want but for many people it will still be sensible to use their pension to pay a regular income rather than  take a lump sum. In the US, where many more middle-income people take systematic withdrawals, advisers spend a lot of time designing investment portfolios suitable for income withdrawals of about 4 or 5 per cent of the capital value. This is a far cry from 150 per cent of GAD.

An income is sustainable when it can be maintained at a certain rate or level and there are two things to consider – maintaining the absolute level and maintaining the real value.

A guaranteed, level annuity will maintain the absolute level of income but over time the spending power (real value) of this annuity will be reduce as inflation takes effect. An investment-linked annuity or pension drawdown policy does not necessarily produce an income that is maintained at the same level because it will rise or fall depending on future investment returns and other factors. One of the objectives of these policies is to provide an income sustainable in real terms but there is obviously the risk that the income could be lower, not higher in the future.

The hope is that with near total flexibility at retirement, clients will want to discuss their options before rushing off to do something that might not be in their best interests. Annuities will continue to be an important option for those who are looking for both tax-efficient income and sustainable income.

The Government plans free and impartial face-to-face guidance on the range of options available to people at retirement but many are sceptical of this because it is simply not practical or affordable.

There will clearly be need for specialist retirement consultants to explain and discuss complex options so the industry needs to get their heads together to work out how this will be done.

Billy Burrows is head of business development at Annuity Line

Billy Burrows: Cheap is not always best for annuities

" I recently read that Tesco is entering the annuity comparison market. This provides me with the perfect opening comments.

Many commentators and annuity broking businesses view the annuity market in terms of lots of people with small pension pots who need to be sold the annuity which pays the highest starting income.

 It is hard to argue with the numbers; over £13bn of annuities are sold every year and the average purchase price is still less than £30,000.

It seems that Tesco and other firms who know a lot about retailing are aiming for this mass market.

But what about those who prefer to shop in more upmarket supermarkets where price is not necessarily the main driver and where personal service and quality are important factors. Where can they go to get advice on their annuities?

This brings me on to the theme of a paper which I have recently published in conjunction with MGM and Prudential and with help from Professor John Maule, a leading authority on behavioural economics.

The paper argues that it is time to question whether the traditional guaranteed annuity should remain as the default option for those with above average sized pension pots."


 To read the full article, click here and you can also download the report Annuities at a tipping point.

Call for pension savers to look at all options

 

In this week's BBC Your Money, Declan Curry looks at how to avoid fraudulent travel deals, sprucing up your garden on a budget and making the most of your pension pot. 

Nearly 400,000 annuities were sold to retirees last year, bought for an average of £28,000 from their pension pot. There has been criticism of the industry for not explaining to retirees that they can buy their annuity from any provider that they choose. This has led to the introduction of a new code of conduct ensuring that pension companies tell their clients that they can shop around.

Shopping around for an annuity or the Open Market Option, means that retirees can buy an annuity from any provider.

Watch the video 'Travel tips and pension pots'  with Billy Burrows from Better Retirement Group.