Leave no stone unturned

Vince Smith-Hughes assesses the key issues that need to be taken into account when conducting drawdown reviews

Believe it or not, it is now more than five years since A-Day. We have seen numerous changes to the pension rules since then, with one outcome being that many ­drawdown plans will now be coming up for a formal GAD review.

These reviews are likely to throw up a whole host of issues for advisers and clients to get to grips with. However, there are also some significant external influences that need to be considered, including:

• The current market volatility
• The reduction from 120% to 100% GAD for income purposes
• The struggle to recover from September's very low 3.25 gilt yield, which determines maximum income. The only other month, in more than a decade, that it has been as low was in April 2009.

Review considerations

There are many drawdown advice-specific issues for advisers and clients to consider. The former must consider whether drawdown remains appropriate for the latter.

To help determine that, they should first look at whether the ­required income can be paid within the limits. Given the fact that drawdown is suffering from a triple whammy of negative impacts, it is by no means certain that this will be possible.

If it is not possible, this could be an overwhelming factor when it comes to the client choosing an alternative route.

Advisers should go on to further consider whether the income is sustainable. It might be useful for them to compare drawdown income levels with the levels of income available through the best - possibly underwritten - annuity.

Calculation of the type B yield required to provide the income will give the adviser the means to assess the risk the client needs to take, in order to have the best possible chance of meeting this yield.

Of course, attitude to risk and the client's capacity for loss here need to also be considered, and taken ­account of with the ­investment funds or portfolio selected.

Potential options at review

There are several strategies that the adviser could consider ­recommending to clients at review, depending on their findings.

This list is not exclusive and it may be that more than one of the following strategies is employed:

• Continue with the current ­strategy and do nothing: it is, of course, possible that both client and adviser are happy with the existing situation and little needs to be done. But a word of ­warning: if income levels are unlikely to be ­sustainable in the future, the adviser should document this to the client to avoid any confusion later
• Reduce income levels to more sustainable levels: this is never an easy message to convey but, nonetheless, is a viable option if the fund is unlikely to keep providing the required income
• Change the investment ­strategy: the options here are almost ­endless, depending on whether risk is ­being increased or decreased, and ­whether special considerations need to be given as to the ­mechanism for providing income. But strategies that should not be overlooked include using guarantees to meet ­capacity for loss requirements, as well as using smoothed funds, which can really help to avoid the issue of taking income at the wrong time
• Changing the solution altogether: this could, for example, include buying a conventional or investment-linked annuity, with all or part of the fund. Investment-linked annuities should not be overlooked here as they can provide similar (often higher) levels of income than drawdown, but with a lower growth required to maintain i­ncome. A smoothed fund can, again, work well for these arrangements.

The key actions will be ­determined by the client's requirements, but there is a multitude of ­considerations and options ­available to ­advisers when considering ­drawdown reviews. One final, vital point is that a combination of ­strategies or a "phasing out" of drawdown may be the best option.

Drawdown remains a flexible and potentially attractive method of providing income. However, in the current economic climate, providing advice at reviews is certainly an area where the skilled adviser can add a huge amount of value.

 Ten considerations that should be taken into account when conducting drawdown reviews:

• Has there been any change in personal circumstances?
• Has the client's attitude to risk changed?
• Has the client's capacity for loss been considered?
• Is the current income level sustainable within the limits?
• Is the amount of income still appropriate?
• What is the yield required to match the best annuity rate available?
• Are there sufficient liquid assets in the fund to continue to pay the required income?
• What fund is paying the income? And is this appropriate?
• Are withdrawal timings appropriate?

• Should the client look at either moving all or part of their fund to another arrangement?

 Vince Smith-Hughes is head of business development at Prudential