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Maximising the benefits and mitigating the risks of Drawdown…
Key considerations for the Drawdown Review Process
For financial intermediary use only.Not approved for use with customers.
Jan Holt, Head of Business Development Team
@retirementwhizz@janholt
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Today we will discuss
• The purpose of Drawdown reviews, HMRC and FCA requirements
• How to calculate relevant and personalised critical yields • Why might a conversion to an annuity be considered?• What might an appropriate process for Drawdown reviews
look like?• Conclusions
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Why is an annuity provider talking about Drawdown Review?
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Risk looks different when you take an income
30 Years of the FTSE – 1984-2014
Volatility
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14 years of volatility – completely beyond your control
You just have to ride it out!
Capacity for loss may see you through this,control may be the key requirement.
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The purpose of Drawdown reviews
AdviserRetirees
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FCA rules for Drawdown reviews
COBS 9.3.3
Outcomes =
personal
recommendations
Regulatory updates 55 and
67
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Best practice for Drawdown reviews – COBS 9.3.3
“When a firm is making a personal recommendation to a retail client about income withdrawals or purchase of short-term annuities, 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 attitude to an income withdrawal or purchase of a short-term annuity and other investments.
COBS 9.3.3
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A key question
Based on the requirements of COBS 9.3.3. is anything missing
from your Drawdown review process?
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Is anything missing from your Drawdown review process?
“A process which doesn’t include both health questions and the practical use of the answers to those questions is likely to result in more clients remaining in drawdown, possibly to their detriment”
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What makes an inadequate Drawdown review?
• Not considering an annuity?
• Failure to ask health questions?
• Failure to include enhanced rates in Critical Yield?
Client
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Critical Yields in the Drawdown process
Income requirements
Construct investment
portfolio
Assess risk profile
Critical Yield
Enhanced annuity rate?
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Critical Yield A – ask yourself this key question
Is this the correct annuity type and shape
for my client?
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Three steps to a personalised Critical Yield
Underwrite
Income Shape
Personal Critical Yield
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65
A personalised Critical Yield in practice
Underwrite
50% Spouse Pension and 5 year Guarantee Period
Income
Qualifies for Moderate Enhanced Rate
Critical Yield Type A = 6.34%
£100,000
Source: Avelo Exchange & Just Retirement Limited – 4.10.13. Based on an individual aged 65, with a £100k fund, no guarantee, no escalation, no value protection, based on RH2 7RT postcode. An annual management charge of 2% has been assumed when calculating critical yields.
Shape
£7,320, sustainable until he annuitises at age 75
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Impact on Critical Yield calculation
Personalised Critical Yield
Quoted CY from Capped DD Quotation
6.34%
Step 3Income 9.93%
Step 2Shape 6.68%
Step 1Underwrite 7.45%
0.00% 5.00% 10.00%
Source: Avelo Exchange & Just Retirement Limited 4.10.13. Based on an individual aged 65, with a £100k fund, monthly in arrears, no escalation, no value protection, 50% spouses pension, 5 year guarantee period, based on RH2 7RT postcode. An annual management charge of 2% has been assumed when calculating critical yields.
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The consequences of an inadequate Drawdown review
• Client complaints – effect on reputation and costs?
• FOS review?• FCA review and or
censure?• A compliance gap? • Overall impact on PI?
Adviser
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Why might a conversion to an annuity be considered?
Health
LTC
Death of spouse
Assets depleted
Mortality drag
Now fully retired
Concerns re performance
required
ATR changed
G’teed income now
important
Legislation, GAD etc
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Is phased conversion to an annuity something to be considered?
Drawdown becomes progressively less suitable as we age.
Annual mortality subsidy based on age of buying annuity
Add
ition
al a
sset
gro
wth
req
uire
d to
cou
nter
act
the
drag
effe
ct a
gain
st in
crea
sing
age
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Annual mortality subsidy based on age of buying annuity
0%1%2%3%4%5%6%7%8%9%
10%
60 65 70 75 80 85 90
Exit strategies are important because of mortality drag
When should annuitisation start?
Financial sense of annuitising
increases
Add
ition
al a
sset
gro
wth
req
uire
d to
cou
nter
act
the
drag
effe
ct a
gain
st in
crea
sing
age
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An appropriate process – meeting the needs of COBs 9.3.3
Frequent reviewsCharge an
explicit facilitated fee
Conduct full fact find
Check Drawdown ATR
Capacity for lossState of health –
self and dependants
Change in circumstances
Relevant Critical Yields
Issue relevant annuity quotes
Discuss options with client
Make recommendation
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Conclusions
Talk to us!
Annuities: Still
relevant and
valuable
Better Client
Outcome
How to Reduce
Ask the right
Questions
A useful Benchmark
Regulatory Risk
Support
adviser
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Important information
It is our intention that the information contained within this presentation is accurate. We
have taken all reasonable steps to ensure that it is up-to-date and where relevant, reflects
the current views of our experts. However, we do not accept any liability for errors or
omissions in the information supplied and if you require clarification on anything, our
recommendation is that you contact us at the address below for verification, or call 0845
302 2287.
Our registered address:
Just Retirement Limited
Vale House, Roebuck Close,
Bancroft Road,
Reigate,
Surrey RH2 7RU.
Regulatory information:
Just Retirement Limited (Registered in England Number 05017193). Registered Office:
Vale House, Roebuck Close, Bancroft Road, Reigate Surrey, RH2 7RU.
Just Retirement Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
www.justadviser.comCalculators, literature library, marketing material
Follow the updates on us on twitter @retirementwhizz @janholt