Nothing stays the same forever
Everything changes over time. Clients who chose drawdown in the early years of retirement, should review that decision throughout retirement. For example, personal circumstances may change, attitudes can alter and external factors could shift the emphasis from drawdown to guaranteed income for life.
Here are some of the more common triggers that could prompt a change. Of course, it isn’t an either/or decision. Clients might choose to remain in drawdown, but increase the proportion of their income that is guaranteed for life.
A 65 year old can look forward to around 10 years of good health on average before things start to deteriorate. Even relatively minor conditions can lead to higher levels of guaranteed income, so monitoring your client’s health during retirement is key.
The prospect of long-term care may have several implications for drawdown clients. Do they want to be burdened with worrying about the performance of their assets? Do they need to consider an immediate needs annuity to fund their care? And if so, do they need to raise money from their drawdown fund?
The death of a spouse can make a guaranteed income for life a stronger proposition. Single life rates provide a higher income and it may not be necessary to provide death benefits.
A power of attorney should be considered before cognitive ability starts to decline. In older age, clients may no longer be capable, or interested, in managing a drawdown portfolio.
Some people become more risk averse as they age. This could be caused by a particular experience or it may simply be a shift in attitude. Whatever the reason, attitude to risk should be reassessed regularly.
If drawdown funds fail to perform as expected or the investment environment looks volatile, these may be reasons to reconsider whether drawdown is the right vehicle for your client’s retirement savings. Also, if your clients have made gains then they may consider locking them in.
Drawdown can be attractive when clients are still working (perhaps supplementing income from their drawdown account). When they retire outright, they’re likely to need a regular income from their retirement savings. This may trigger a review of whether drawdown is still the right proposition.
The rates for guaranteed income for life products improve significantly at older ages. Eventually, there comes a point where it’s almost impossible, without taking significant risks, to match the return.
Sometimes clients will simply decide that they would prefer to get on with enjoying their retirement rather than worry about managing their investments. Alternatively, essential expenses may have increased and clients require more guaranteed lifetime income.
New legislation may cause decisions to be revisited or existing legislation might require a rethink where the treatment of pension funds changes during retirement.
Divorce can have a number of potential implications. As a minimum, it may no longer be necessary to provide for a former spouse on death, which means guaranteed income for life rates become more attractive.