It doesn't have to be a black and white choice!

Pension freedom has accelerated the use of combinations of annuities and drawdown as part of a balanced solution and two companies, LV= and Retirement Advantage, provide packaged solutions.

We love jargon in pensions and the option for a combination of different retirement income options has had various different labels: hybrid plans, blended solutions, combination plans and cocktail solutions.

The term hybrid is used for a single policy that allows for a combination of annuities and drawdown from the same provider, whereas a blended solution refers to option under a Sipp wrapper.

The case for combination solutions

I have set out the reasons a combination may result in better client outcomes. One reason that often gets over looked is that now clients with funds of less than £100,000 are investing in drawdown, the annuity part of the combination reduces the overall risk.

There are several ways of justifying the case for a blended solution, but the strongest cases can be made on the following basis:

  • It reduces or diversifies risk in retirement
  • It enables clients to meet more than one retirement objective
  • It produces better client outcomes
  • It is useful for reducing or diversifying risk in retirement

A good case for blending can be made by looking at the risks people face at retirement and ways to reduce these risks. Generally speaking, people are not faced with binary risks, for example, income or capital risks, but a multitude of risks including:

  • Risk that inflation will reduce spending power
  • Risk of living longer than expected and running out of income in the future
  • Risk that circumstances such as health or income requirements may change in the future
  • Risk that equity prices and or interest rates could rise or fall

There is no single policy that effectively manages all of these risks. For instance, a guaranteed annuity is the only way to protect against the risk of a client outliving their pensions, but they do not provide flexibility if circumstances change.

Drawdown is the most flexible option, but there is a risk that fund values could fall if future investment returns are less than expected and a risk that income could eventually run out.

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