Since pension freedoms burst onto the scene in 2015, drawdown has been considered by far the most popular way to access pension savings. Being able to dip into a pension while keeping the rest invested is an empowering choice for customers.
But big choices can also bring with them a burden of responsibility.
Data from LV shows that a top concern for many clients in retirement is running out of money. Few may realise that accessing their funds frequently during market downturns could lock in any losses and drain their retirement savings faster than they had hoped.
The reality is that choices lead to different outcomes, and this is not always easy or pleasant for people to live with.
This human need for feeling secure is one of the key reasons why the role of the financial adviser is so important in helping steer clients through changing times and shaping advice and product solutions that, over the long term, enable their clients to enjoy better outcomes than they might otherwise be able to achieve.
The findings of the Financial Conduct Authority's thematic review of retirement income advice show that most advice was aligned to the individual needs of the client. But less attention was focused on fixed options such as annuities, which offer a guaranteed income during retirement.
As annuity rates were low for many years, unsurprisingly they fell in popularity in the wake of pensions freedoms.
But the economic crisis in the last quarter of 2022, which caused a sudden and dramatic spike in interest rates, led in turn to customers being able to get better value from higher yields for annuities. This year, annuity yields rose to around 6.5 per cent compared to 4 per cent in 2022.
Strategies needed to mitigate volatility
Unforeseeable change remains a constant. So, pro-actively developing strategies for mitigating volatility, and especially downside risk, to help customers feel confident their plans are future-proof for them is perhaps now one of the most challenging and vital dimensions of the adviser’s role.
Pensions freedoms have also empowered advisers to search out creative new ways of using a blend of different solutions tailored to the client’s needs to avoid running out of money in retirement.
Generating a secure retirement income does not have to be a binary choice between annuity and drawdown.
There are some excellent provider solutions that can help blend the best of both worlds, allowing a truly bespoke approach for individual customer needs to be built.
The FCA retirement income review signals that financial advice businesses should be looking to evidence that all options have been considered before being presented to the client, and that the client’s personal characteristics and needs have been part of this process.
LV research revealed that 32mn UK adults (60 per cent) are not comfortable with financial uncertainty, and more than half (55 per cent) agree that they are more concerned about the possible losses than gains when faced with a financial decision.
