income drawdown the good the bad and the ugly · the good the bad and the ugly learning objectives...

INCOME DRAWDOWN THE GOOD THE BAD AND THE UGLY


Learning objectives

• Identify the risk factors associated with income drawdown

• Be able to list the regulator’s main concerns with income drawdown

• Identify how you can review your client’s drawdown plan compliantly and cost effectively

PENSION FREEDOMS CHANGING MARKET

FREEDOM & CHOICE THE STORY SO FAR

Source: FCA data bulletin issue September 2018


Source: FCA data bulletin issue September 2018 (October 2017 to March 2018)


4.7% - FCA average

withdrawal rate 2016/17.

5.9% - FCA average


6% - Royal London median

withdrawal rate 2016/17

7% - Royal London median



INCOME DRAWDOWN COHORT LIFE EXPECTANCY

Life expectancy of a male age 65 today is 86

Source – Past and projected data from the period and cohort life tables, 2016-based, UK: 1981 to 2066

INCOME DRAWDOWN COHORT LIFE EXPECTANCY

Source – Past and projected data from the period and cohort life tables, 2016-based, UK: 1981 to 2066

Life expectancy of a female age 65 today is 88

NUMBER OF PEOPLE REACHING AGE 65

65 in 2018

Source: ONS Analysis of population estimates tool June 2018

RETIREMENT OUTCOMES REVIEW FINAL REPORT


Protecting consumers from poor outcomes • Preventing consumers being defaulted

into cash

• Default investment pathways for non-advised clients

• Transparency of charges

Source: FCA Retirement Outcomes Review Final Report June 2018

Improving engagement with retirement income decisions • Earlier and clearer wake up packs

and risk warnings

• Improving guidance for consumers

• Improving shopping around for annuities

• Early access to savings without having to enter drawdown



Promoting competition by making the cost of drawdown clearer and more comparable for consumers • Clearer information when a consumer

enters drawdown

• Enabling the introduction of a drawdown comparator



INCOME DRAWDOWN A RISKY PRODUCT

FCA CONCERNS

Source: FSA Retail Conduct Risk Outlook 2012

Risk

Risk

Risk

Risk

Risk

Sustainability

Sustainability

Sustainability

Capacity for loss

Capacity for loss

Complex

Lack of understanding

FCA CONCERNS

Source: FSA Retail Conduct Risk Outlook 2012

‘potential for mis-selling income drawdown products, as advisers are likely to need to consider other variables (capacity for loss, risk, higher costs, etc) that are not typically considered when an annuity is purchased...’

‘Consumers have the potential to suffer detriment if they are sold an income drawdown type product when an annuity would have been more appropriate to their circumstances. This risk has the potential to affect all those people entering retirement in the near future..’

FACT FIND INCOME DRAWDOWN

FACT FIND AND RESEARCH

UNDERSTANDING YOUR CLIENT

When is your client looking to retire?

Do your clients…

• want to continue working full-time/part-time?

• have any health issues?

• want to protect their income from inflation?

• want the option of changing their income in the future?

• consider their pension wealth to be joint assets or individually owned?

UNDERSTANDING YOUR CLIENT

Best practice from the FCA

• Clearly establishing their goals and matching the recommendation to them

• Identifying their previous investment experience

• Prioritising his goals – some may be more important than others

• Identifying the client’s attitude to investment fluctuation and capacity for loss

YOUR ANALYSIS

INCOME SUSTAINABILITY INCOME DRAWDOWN

INCOME PLANNING AND SUSTAINABILITY MODELLING

• Income & expenditure questionnaire

• Understand limitations & explain

• Realistic growth rates

• Large planned expenses

• Revisit regularly

SEQUENCE RISK FLAT RETURNS

-10%

-5%

0%

5%

10%

15%

20%

1 2 3 4 5 6 7 8 9 10

Year

Scenario Fund Value after 10 years

4% flat return

£80,000

Source: Royal London, August 2018 Assumes £5k withdrawal, increasing 2% pa, from £100k pot

Ne

t g

row

th r

ate

(%

pa

)

SEQUENCE RISK INITIAL POSITIVE RETURNS


4% flat return

£80,000

Initial positive returns

£89,800

-10%

-5%

0%

5%

10%

15%

20%

1 2 3 4 5 6 7 8 9 10 Year

Source: Royal London Assumes £5k withdrawal, increasing 2% pa, from £100k pot

Ne

t g

row

th r

ate

(%

pa

)

SEQUENCE RISK INITIAL NEGATIVE RETURNS


4% flat return

£80,000

Initial positive returns

£89,800

Initial negative returns

£58,800

-10%

-5%

0%

5%

10%

15%

20%

1 2 3 4 5 6 7 8 9 10

Year

All scenarios return 4% on average, but can provide significantly different outcomes

Source: Royal London Assumes £5k withdrawal, increasing 2% pa, from £100k pot

Ne

t g

row

th r

ate

(%

pa

)

MODELLING OUTCOMES STOCHASTIC

Range of outcomes

Source: Royal London, August 2018, showing stochastic modelling outcomes

INCOME SUSTAINABILITY HEAT MAP

Highly Sustainable 85%-100%

Reasonably Sustainable 75% - 84.9%

Moderately Sustainable 50% - 74.9%

Not Sustainable 0 - 49.5%

Source: Royal London, December 2018

“Our current view is that a 4% withdrawal rate

is highly sustainable.”

*Depending on a term of 25 yrs, invested in GRIP3, assumes a 1% total charge.

Source: Royal London

INCOME DRAWDOWN CHALLENGE

• More people using income drawdown

• Greater regulatory focus on evidencing income sustainability

• Regular reviews and governance are critical

• Providing a review service can be time-consuming and costly

ONGOING REVIEWS

• Provide ongoing advice and/or service

Ensure

• Their health hasn’t changed

• Their attitude to risk hasn’t changed

• The level of income they receive still supports their needs

• Personal circumstances haven’t changed

RETIREMENT INCOME ONGOING REVIEWS

• …, there is no real guidance as to what should be included in a drawdown review beyond the HMRC requirements. This factor will almost inevitably lead to failings in processes

• Based on this fact, and the absence of specific rules around the review process, the drawdown review must be treated very much in the same way as the original recommendation to utilise a drawdown solution.

Source: PFS Thinkpiece Number 109 November 2014


Source: COBS 9.3.3

• COBS 9.3.3 states:

• When a firm is making a personal recommendation to a retail client about income withdrawals, … it should consider all the relevant circumstances including:

(1) the client's investment objectives, need for tax-free cash and state of health;

(2) current and future income requirements, existing pension assets and the relative importance of the plan, given the client’s financial circumstances;

(3) the client’s attitude to risk, ensuring that any discrepancy is clearly explained between his or her attitude to an income withdrawal, … and other investments.


• Age 75

• Scenario positioning

• Capacity for loss

• Review triggers – Brexit? Heightened volatility

• Some providers have tools which can alert you to this. Saves you time, money and potential complaints

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

81.5%

IMPACT OF A 10% FALL ON INCOME SUSTAINABILITY

SU

STA

IN

AB

ILIT

Y S

CO

RE

92.6%

Source: Royal London, September 2018 *Depending on a term of 25 yrs, invested in GRIP3, assumes a 1% total charge.

Before After

Before After

4% income

5% income

100K

INVESTMENT

WITH DIFFERENT

INCOME LEVELS

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

81.5%

IMPACT OF A 10% FALL ON INCOME SUSTAINABILITY

SU

STA

IN

AB

ILIT

Y S

CO

RE

92.6%

Source: Royal London, September 2018 *Depending on a term of 25 yrs, invested in GRIP3, assumes a 1% total charge.

55.1%

28.0%

Before After

Before After

4% income

5% income

100K

INVESTMENT

WITH DIFFERENT

INCOME LEVELS

A TRACK RECORD IN

• Track record in growing and delivering an opportunity for sustainable income in challenging market conditions

• Starting with £100K pot, taking 4% monthly income since launch (28 August 2012 - 31 December 2018)

SUSTAINABLE INCOME

Name

Annual income level

£4,000 £4,500 £5,000 £5,500 £6,000

ABI Mixed Investment 20%-60% Shares - pen

£104,896.47 £101,442.72 £97,988.96 £94,536.04 £91,082.29

GRIP 1 £102,135.71 £98,592.49 £95,049.26 £91,506.89 £87,963.66

GRIP 2 £110,016.65 £106,398.96 £102,781.26 £99,164.43 £95,546.73

GRIP 3 £118,003.11 £114,317.04 £110,630.97 £106,945.79 £103,259.71

GRIP 4 £127,568.00 £123,798.18 £120,028.36 £116,259.44 £112,489.62

GRIP 5 £133,357.10 £129,536.39 £125,715.68 £121,895.88 £118,075.17

Source: Lipper, 31 December 2018. Past performance is not a guide to the future. Prices

can go down as well as up. Investment returns may fluctuate and are not guaranteed so

you could get back less than the amount paid in.


Learning objectives

• Identify the risk factors associated with income drawdown

• Be able to list the regulator’s main concerns with income drawdown

• Identify how you can review your client’s drawdown plan compliantly and cost effectively

THANK YOU

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales

number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in

England and Wales number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Corporate Pension Services Limited. Registered in England and Wales number 5817049. Registered office: 55 Gracechurch Street, London, EC3V 0RL.

February 2019 PR P8 PN 0121

income drawdown the good the bad and the ugly · the good the bad and the ugly learning objectives...

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