Mark Ormston, director of propositions and corporate partnerships at Retirement Line, says the bucket approach works to allow people to break up their retirement funds.
“People can say ‘I have just accessed my 25 per cent tax free cash so I will use that in the short term but I don’t have to use the rest’,” he explains.
“Once people start accessing their pension and maybe reducing their hours at work, that's where drawdown products and structured products work really well, because there is flexibility built in.
“That's the real downside with an annuity – there's that fixed nature. You have to cover the immediate needs as well as thinking about the future requirements, which is where drawdown products can help. So mid-term buckets work particularly well here.”
But one downside of using the pots method is that “life may not work out that way”, especially with the market conditions currently. “This is where the approach could be slightly different and is more about securing the essentials,” Ormston says.
He suggests that people could use a secure income, such as an annuity, to pay for non-negotiable expenditure but use the buckets approach to save for general retirement or to leave money for their children.
“I do think that the bucket approach is more of a helpful tool to get people thinking about these things,” he says.
Andrew Tully, technical director at Canada Life, agrees that while buckets could help – as people like to put a label on things – it is important to remain flexible.
“For example, a client might have short, medium and long-term buckets in the current climate but might have actually been cashing in from their long-term bucket because the short-term buckets were doing quite poorly,” he says.
“So as long as it's reviewed and flexible enough, people can mess about.”
Putting money into an annuity can also help give people income and can offer some protection against falling markets.
“Putting some of your money into an annuity can give you your income, and what that means is that you're invested but you're not taking money out so you're not having that pound cost ravaging,” Tully explains.
“You can just leave it and it becomes an accumulation pot that can just be left to grow and you can maybe dip into overtime. So I think we will see more use of annuities as part of an overall solution.”
Innovation
Things are changing in the retirement planning space as more can be done on an automated basis. For example, some providers automatically rebalance funds on behalf of the adviser.
