Practice what I preach
It has been 16 months since I started advising clients again after a break of four years. Obviously much has changed after pension freedoms not least that annuities are less popular and drawdown has become the new default at retirement. This is not a problem nor an issue for a good adviser because they will always work out what is the best solution for the client rather than being influenced by a product sale. The same cannot be said for some non-advised brokers who are still pushing products.
During the time I was not advising I wrote a number of guides about retirement income and am still writing these guides today and I feel duty bound to ‘practice what I preach’.
I have written a lot about the advantages of a combination of annuities and drawdown and recognising how objectives and attitudes change with age. I was therefore delighted to put all of this together in a recent piece of advice.
Somebody I had spoken to about annuities over 10 years ago contacted me recently to say that he was thinking of purchasing an annuity from his drawdown plan which he had arranged without advice. He was just over 70 years of age and in good health bar a minor aliment. My advice was essentially in two parts; considering whether it was appropriate to purchase an annuity or some other plan which paid a guaranteed income and then researching the market to get the best deal.
The catalyst for the approach from my client was his concern about the outlook for global equities with so much uncertainty with Brexit and Trump. He had in fact converted some of his drawdown investments into cash because he was so concerned.
Before rushing to get the best annuity rates I did what all good advisers should do; look at all the relevant options and issues. First, I considered if it made sense to defer purchasing an annuity for several months or even years as rates are still historically low. Rates improved in the first quarter of 2018 but recently have fallen back slightly in the last few weeks. I have been writing that I expect annuity rates are slowly coming out of the doldrums so understandably I was quizzed about the merits of waiting until annuity rates improved.
The answer was very technical because in order to increase the annuity purchasing power of a pension pot the pension must increase by more than the implied interest rate for the annuity. If the underlying interest of the annuity is currently 2% then the fund must growth by at least 2% to maintain the annuity purchase power but at the moment, the interest on cash is negligible. Added to this, the fund must growth by a little more to compensate for mortality drag. If bond yields rise the underlying interest rate on the annuity will rise and therefore the fund will need to grow less.
In client friendly language this translates into ‘the maths involved in working out when is the best time to purchase an annuity is complicated as it involves both annuity rates and where the fund is invested’.
The next step was working out if there was a better solution to an annuity and I analysed a 5-year fixed term annuity. The maths behind this suggested that annuity rates would need to be about 5% higher in 5 years’ time in order to maintain the annuity spending power. We agreed this was not an unrealistic expectation.
So far, I had established that it made sense to purchase the annuity sooner rather than later and there was a case for considering a fixed term income plan so it was logical to look at a combination of the two.
Finally, it was time to research the market. From my perspective this is the easiest part of the exercise. Using the excellent AMS quotation portal I was able to identify the best deals for the annuity and fixed term; just and Primetime. It might be easy for me because I understand all the different nuances and quirks, especially when entering health information, which a non-specialist adviser may not know.
The point I am making, what may seem like a simple question often requires some complex analysis in order to give the right answer. This is exactly what advisers are trained to do and do every day, but the same is not true of non-advised brokers.
In this case, the icing on the cake was that the fee for advice was about half the commission quoted by a non-adviser broker. This just confirms something which I preach “why go to a non-advised broker when you can get expert advice for half the price”.