Maximising the benefits and mitigating the risks of Drawdown… Key considerations for the Drawdown Review Process For financial intermediary use only. Not.

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

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

Why is an annuity provider talking about Drawdown Review?

Risk looks different when you take an income

30 Years of the FTSE – 1984-2014

Volatility

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.

The purpose of Drawdown reviews

AdviserRetirees

FCA rules for Drawdown reviews

COBS 9.3.3

Outcomes =

personal

recommendations

Regulatory updates 55 and

67

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

A key question

Based on the requirements of COBS 9.3.3. is anything missing

from your Drawdown review process?

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”

What makes an inadequate Drawdown review?

• Not considering an annuity?

• Failure to ask health questions?

• Failure to include enhanced rates in Critical Yield?

Client

Critical Yields in the Drawdown process

Income requirements

Construct investment

portfolio

Assess risk profile

Critical Yield

Enhanced annuity rate?

Critical Yield A – ask yourself this key question

Is this the correct annuity type and shape

for my client?

Three steps to a personalised Critical Yield

Underwrite

Income Shape

Personal Critical Yield

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

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.

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

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

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

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

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

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

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