Chapter 7: Giving advice on pension income options

Question 1

Identify the key factors you would consider in assessing a client’s capacity for loss when advising on the potential transfer of safeguarded benefits.

Answer 1

• Proximity to retirement/drawing an income/taking capital.
• Likely longevity/health/investment term.
• Any dependants/importance of death benefits.
• ATR.
• Income needs in retirement/expenditure/likely pattern of expenditure/anticipated income changes.
• Importance of safeguarded benefits/guarantees.
• Other financial objectives/retirement objectives/change in circumstances.
• Other investments/defined contribution pension funds/rental income/partner’s assets/nonsecure income sources.
• Secure income sources/State pension forecast.
• Capital needs/debt outstanding.

Question 2

Carlos, aged 63, has a personal pension plan (PPP) valued at £340,000. The PPP is wholly invested in a lifestyle annuity fund with a selected retirement age of 65.

Carlos has a high attitude to risk and plans to draw an income via a series of uncrystallised funds pension lump sums when he retires at the age of 65.

Explain why Carlos’ current investment approach is unsuitable and why he would benefit from an earmarked investment strategy in retirement.

Answer 2

Why lifestyle is unsuitable:
* Funds will de-risk/investment is targeting annuity purchase;
* so, funds will be held in cash and fixed interest/low risk/doesn’t meet his ATR;
* meaning growth is below inflation/less potential for growth/ increases the chance of fund running out/charges have larger impact on returns.

Why earmarked strategy is suitable:
* Can invest funds needed for first 3-5 years of income in low risk/cash;
* which means there is no risk of reverse pound cost averaging;
* and helps mitigate sequencing risk/avoids having to sell assets in a market downturn.
* Balance is invested to achieve above inflation/high growth/in line with his ATR.
* Earmarking reduces likelihood of funds being exhausted/ensures strategy is more sustainable

Question 3

Describe to Alexis the four key risks she is subject to in respect of her portfolio withdrawals

Answer 3

Longevity risk;
* is the risk of living longer than anticipated/outliving pension pot.
Investment/market risk;
* is the risk of poor performance/investment loss.
Inflation/economic risk;
* is the risk of investment growth being less than inflation/loss of purchasing power.
Sequencing risk;
* is the risk that comes from the order in which investment returns occur/risk of withdrawals in a declining market.