We believe there are three different types of retiree that go into long term drawdown.
Getting the best possible outcome from long term drawdown is very hard. The key difference between each type is their relative ability to manage their income and investments themselves over their retirement years and therefore the help they need.
We look at each type below, then consider what may be the best route for all three. Finally we look at how much each route may cost in terms of annual charges.
Let’s exclude some people first
We will exclude those lucky enough to have built up lots of final salary pension and little in the way of defined contribution pension pots.
For them, any small pension pots also built up can be taken as cash at retirement. They don’t really need to think too hard, or need much help to enjoy retirement.
We also exclude those who already know they want to use their whole pot to buy a guaranteed lifetime income.
They need help with the purchase to make sure it is right for their needs, but after that there is no real need to do much more. An annuity specialist, such as Hargreaves Lansdown can look at all the annuity options, help you choose what’s right for you and get you the best pricing available in the market.
Who are we looking at?
The people we are really looking at are those taking income each year from their pension pots to make up at least some of their total expected retirement income.
They are likely to have over £50,000 in total pension pots at retirement. If you are one of these people you definitely have a lot to think about and may need help.
So what are the different types?
Type 1 – The experienced DIY expert
This person will usually have a background, or keen interest, in finance. They have previous knowledge of choosing investments and managing risk. They understand pensions well and are able to plan how much they need to take each year to be sustainable. They definitely want to be in control of their investment choices.
This is a small percentage of people, maybe 10% or so.
Type 2 – Unable to manage without advice
This person will have little interest in finance, investment and pensions. They need recommendations from an adviser which they will need to pay for. This adviser will build a plan for them and recommend an investment portfolio. They also need help with the general admin such as completing all the forms needed. They need this on an annual basis with updated recommendations on what to do.
As long as they can afford and access this advice, this will always be the best choice if they wish to go into long term drawdown. If they cannot afford or access this advice, or do not want to pay for it, then it is unlikely drawdown will provide them with the best outcome. Instead, buying a lifetime guaranteed income may be a much wiser choice.
This is maybe around 30-40% of people.
Type 3 – The inbetweener
This type of person is not an expert, but has enough knowledge to manage drawdown themselves with enough guidance and support. They can use tools like ours easily to build and maintain a plan annually and also have some basic knowledge of investment and risk. They can do the initial admin themselves and monitor pot values at least annually to check if everything still looks on plan.
This may be up to 50% of people.
What provider may suit each best?
Type 1 is likely to get the most value from a low cost provider with a wide range of investment choices.
They can choose between many different funds to build a portfolio, or even individual shares and bonds. They will monitor performance and switch investments when they feel appropriate.
This is all they need, along with tools like ours to manage what’s sustainable whilst sorting out the payments they want from their pots themselves.
Type 2 will be recommended the best provider for them as part of the advice process.
Type 3 may best suit a provider with lots of guidance, support and default options.
This support will provide automation around payments to avoid lots of admin, with the opportunity to adjust these payments annually, or take unplanned ad hoc payments if ever needed.
They will also need a default investment strategy. This should comprise of a mix of funds which best suits how they actually plan to take their money. A product like this doesn’t currently exist, but we plan to launch the first version with a provider and investment manager in March.
How much does each route cost?
There are a few elements of cost. These are essentially:
- The provider costs, usually a % of your fund or a fixed £ amount per month.
- The investment costs, funds charge a % per year
- Trading/dealing costs £ per fund or share purchase
- Plus maybe some admin costs £ per withdrawal etc.
In addition, if you take advice there is a fixed initial £ advice cost, plus an ongoing % advice cost.
Type 1 total costs will depend on the actual provider and underlying investments chosen.
Whether these funds are passive (just track the market) or active (try and beat the market) will largely determine costs. Along with the frequency of trading and withdrawals.
These will vary from person to person, but, all in, these costs may add up to between 0.3%-0.5% of your total pot per year. This assumes the fund is over £100K so fixed dealing and admin charges are a small proportion, passive funds are chosen and buying and selling is relatively infrequent.
We work with low cost providers such as Interactive Investor who offer a product just like this.
The key advantage here is usually it can be done at the lowest cost in terms of charges. Also people who fall into this type generally enjoy this hands on management of their investments.
Type 2 total costs (including the advice element) are likely to range between 1.5% to 2.5% a year, plus any initial one off fixed advice fees, which may be up to £5,000.
The key advantage here is that they will receive recommendations on what to do, so don’t need to manage things themselves.
Not all advisers are the same and we work with vetted advisers such as WPS advisory if you need whole of market advice on all products available.
We also signpost lower cost restricted advisers who can offer advice and recommendations on their own specialist drawdown options such as M&G Wealth.
Type 3 total all in costs on our new guided product will range between 0.7% and 0.9% a year depending on the exact split of funds in the overall default investment strategy based on your plan.
This is a middle ground, offering lots of support and guidance, but not a recommendation. This allows people, who may not otherwise be able to, manage drawdown alone at a far lower cost than taking ongoing advice.
Are you type 3?
If you believe type 3 is the best match for you and you have any interest in our upcoming guided product launch let us know below if you haven’t already.
Our soft launch testing starts in February, where we will test the whole journey ourselves, with the aim of providing it to anyone interested in March.
You can also find more details on other aspects of it in our previous blogs.
We are also always happy to answer any feedback, suggestions or questions you may have.
Just email us at contact@guiide.co.uk if you do or if you would like to give us any feedback, or even be part of our soft launch to help us improve the process.
If you like the sound of the product and may be interest when fully launched just leave your email below.
We have had around 400 of our subscribers show some interest so far from previous blogs, which hopefully means there may be demand for this type of innovation.
Disclaimer
All of the above is intended for information only. Further details of the product will be provided in due course. Other pension products are available and if you are unsure on what type of product or investments could be right for you, we recommend that you take the advice route.
If you choose a product or advice with any of our partners discussed above we do not receive any referral payments. Some license our technology, so we do have other commercial arrangements with them but we do not receive any payments should you choose them as the right product or adviser.
