Lisa Webster: In tough times advisers show their worth

We all know that annuity sales have been in decline for some time with the rise in popularity of drawdown under the Pension Freedoms and the poor value they are perceived to offer. According to the FCA’s latest figures only 11% of plans accessed for the first time were used to purchase an annuity in 2018/19. This percentage has been falling since the freedoms were introduced as the figures were 13% and 12% in 2016/17 and 2017/18 respectively. However, the market troubles of the last few weeks will have given many a sharp reminder of the downside of all that freedom. Of course for most of us still a few years from retirement, we have time to ride it all out. But what about those at the point of retirement? Someone who bought a lifetime annuity in January might be looking quite smug right now, feeling warm and fuzzy with the security it brings. Those who were planning on accessing benefits for the first time in the near future will be a whole lot more uncomfortable. There has been much debate about how relevant lifestyling is in a Pension Freedoms world. When only 11% of people are purchasing an annuity it certainly seems questionable to lifestyle the whole fund as the default option. But the recent market conditions certainly emphasise the benefits of a certain amount of lifestyling. Take John, who plans celebrating his 65th birthday on 15 March by retiring and taking his PCLS to go off on a cruise. He has some other sources of income so isn’t on planning on taking any drawdown just yet. Full scale lifestyling may not be ideal as he could be in drawdown for another 30 years, but there would definitely have been a benefit for him to have gradually moved some of his fund into lower risk assets to access his PCLS without having to sell in current conditions. Of course, crystallising anything right now isn’t ideal as you are still locking in the lower value of the drawdown pot. Yes, if the funds recover then you still benefit from the growth, but this will be in the form of taxable income, what you can’t get back will be the element of PCLS lost as the overall fund value is lower at point of crystallisation. It is when times are more challenging that advisers can add the most benefit. Many direct clients can be savvy investors and find opportunities and bargains in a falling market, but whether they have the knowledge of pension rules and implications of retirement decisions on the long term position is a different matter. How many in John’s position will have considered using UFPLS (or max FAD) as an alternative to minimise the amount crystallised? And balanced this out against triggering the MPAA and the tax they would pay versus taking it all as PCLS? At times like these advisers can be worth their weight in gold, and may be able to help John relax on that cruise – after making sure he’s stocked up on hand sanitiser of course. Lisa Webster is senior technical consultant at AJ Bell

Lisa Webster: In tough times advisers show their worth

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