The low gilt yield environment is impacting the financial advice given to people when it comes to taking an income from their pension, according to new research by Skandia*.
Over half of advisers are recommending their customers either delay taking their pension benefits until the situation improves, or they phase money into drawdown, to benefit from any potential upturn. These tactics highlight the benefit financial advice can have for customers, and how having flexibility within a pension arrangement can make a big difference.
The Skandia data shows that 29% of advisers are recommending their customers use other savings as a means of providing their immediate income needs, delaying the use of their pension savings until later. Using other savings first, such as ISAs, leaves the pension fund untouched and available for drawdown as and when the situation improves. The changes made to the income drawdown rules in April 2011 means more people can delay accessing their pension benefits as they no longer have to buy an annuity by age 75, which is helping to provide greater flexibility at a time when people need it.
Care should be taken when considering this type of retirement income planning. If additional money is drip fed into income drawdown when conditions are not favourable, i.e. gilt rates or investment markets have fallen further, it could have a negative impact on maximum income levels.
A further 22% of advisers are recommending customers phase their money into drawdown, to benefit from any potential upturn of both investment markets and gilt yields. By keeping some pension money back, and drip feeding it in when stock markets and/or gilt yields improve could mean creating a higher income level whilst inside a three year review period. If the pension scheme is structured in the right way the higher income level will apply to the entire drawdown fund, not just the additional amount drip fed in, making it a key tactic in today’s volatile investment market.
Care should be taken when considering this type of retirement income planning. If additional money is drip fed into income drawdown when conditions are not favourable, i.e. gilt rates or investment markets have fallen further, it could have a negative impact on maximum income levels.
Keeping some pension money back is a particularly good tactic for those who have a pension contract which does not allow them the option of annual reviews. If they only offer the statutory three year review period, then people have to wait a long time before they can benefit from any improvement in market conditions.
These kind of planning opportunities are particularly valuable in a retirement market where the gilt yield has declined significantly, impacting the maximum income available from both income withdrawal arrangements and pension annuities.
Adrian Walker, Skandia’s pension expert, comments:
“The cap on the maximum amount of income someone can withdraw from their pension is a cause of real frustration for many people. However, there are things people can do to help improve their income levels, and advisers are right to be looking at phasing and delaying as two alternative options.
“People should check their pension contracts and ensure that these options are available to them. If they are not available then they may need to consider moving to a provider who can help provide them with this flexibility in retirement. People should also look for providers who have the option to annually review the maximum income on their income drawdown fund. This will provide them with the opportunity to increase their income each year if market conditions improve, and be able to lock in the higher income for a three year period regardless of volatility in investment markets.”
*source: Skandia’s Q1 Adviser Confidence Barometer. 13 February 2012, completed by nearly 1,000 financial advisers.
