Regulatory Context The FCA has highlighted the risk of running out of money in defined contribution drawdown. Important areas previously highlighted by the FCA for clients in drawdown include questions such as: • How has the level of income the client is taking been justified? • Is this income sustainable and how is this quantified? • What measure of stress testing has been used and why? The FCA thematic review and retirement income advice assessment tool guidance emphasise the importance of: • Justifying the level of income taken by the client. • Quantifying the sustainability of the income. • Stress testing measures used to ensure the client’s financial stability. Given the continuing investment challenges in the world today, it is crucial to consider how clients are treated during periods of uncertainty. Ensure the file demonstrates that these have been considered and understood by your client, particularly income sustainability and the concept of managing future risk in uncertain times. What the Regulator says about ‘process’ To put it simply, they’ve said a lot! Paradigm has significant resource available to help in this regard so I don’t propose to repeat it all here. The Thematic Review, and in particular the Retirement Income Advice Assessment Tool (RIAAT), has been very informative in setting out the Regulator’s requirements and expectations. Both are required reading for any practitioner in the at retirement market. Within the RIAAT tool the Regulator considered in some detail how an income may be delivered to a client and distinguished between withdrawal types and withdrawal strategy which is worth reflecting on how this is delivered within your own process. Some of this detail I have included below. Withdrawal considerations This considers whether the recommended withdrawal strategy is likely to be suitable for the client’s investment objectives for their retirement savings. A withdrawal strategy is not the same as a withdrawal type: • The withdrawal type is the method(s) by which the client withdraws funds from their retirement savings. • The withdrawal strategy is the overall strategy that a firm puts in place to manage the client’s withdrawals over their lifetime or investment horizon (if sooner). A withdrawal strategy may include multiple different withdrawal types from the client’s retirement savings. For example, a sustainable withdrawal rate strategy is likely to fluctuate overtime and need both monitoring and ongoing reviews. Whether or not such a strategy is suitable will depend on the client’s objectives and needs etc. Withdrawal type Within the RIAAT guide the following withdrawal types were detailed, none of which would be a surprise to a financial planner: • Flexi-access drawdown (with all its variants: PCLS and taxable withdrawals, full/partial PCLS only, taxable withdrawals only); • Phased/Partial flexi-access drawdown (part of pot, not entire fund); • UFPLS (regular payments, monthly or less frequently); • UFPLS (part of pot, not entire fund); • Full encashment and small pots e.g. paid under the small lump sum regime. • Fixed term annuity (full or partial pot) • Pension annuity purchase (full/partial pot) As we know, pension legislation can be quite complex, so I’ll remind you of some of the technicalities to consider for some of the different withdrawal types that I’ve just covered Drawdown for clients is a generic term. So we need to be mindful of the type of plan the client has. Specific approaches include capped drawdown, flexi-access drawdown, uncrystallised fund pension lump sum (UFPLS) and optional short-term or fixed term annuities. The most appropriate method will depend on whether your client’s scheme was in place before 6 April 2015, and their particular aims and objectives. Capped drawdown I’ll start by looking at capped drawdown. I’m not going to cover all of the technical issues, but rather think about and remind you of the key aspects that may affect the outcome for your client. Post 6 April 2015 capped drawdown is no longer available for new arrangements. If on 5 April 2015 a capped drawdown fund was already in place, this arrangement can be retained. So under that arrangement, if the scheme allows, new funds can be designated to the existing capped arrangement and income can be drawn under this arrangement as per capped drawdown rules, or the existing capped drawdown arrangement can be converted into a flexi-access drawdown. The key point to consider is that staying within the capped limits for income will not trigger the Money Purchase Annual Allowance (MPAA). 5 Income Drawdown
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