For many readers, Inheritance Tax (known as IHT) is a major…
As discussed in earlier articles, providers are now launching products to challenge the new era of pension freedoms. Recently launched by a couple of providers, is a product that can be described as a “blended option” retirement product. This approach is basically a mix of an annuity and a pension drawdown with a cash account all held in a single tax advantaged wrapper. This provides a considerable amount of flexibility for retirees in terms of varying income and also can be useful for tax planning.
This is may be a product worth considering because it offers a mix of annuity and drawdown which can provide an individually tailored blend depending on a retirees situation. Some retirees may need to ensure that day-to-day costs are covered by a guaranteed, stable income stream but they may feel able to risk some of their pension pot by investing in a drawdown fund which would cover discretionary expenditure like holidays, home improvement, gifts etc. Income can be stopped (this might be useful if other pensions or state pensions kick in later in retirement), started and varied with the facility to internally redirect income into your drawdown plan. Having a guaranteed element in your retirement income can potentially reduce risk and increase certainty and I believe that this is increasingly important , especially at the moment, as stockmarkets become increasingly volatile. This product can accommodate those with medical or lifestyle problems as it offers enhanced annuity rates as well as fully fit retirees who can benefit from a competitive guaranteed annuity rate.
This product also provides comprehensive death benefits which can be very important where one spouse will need to depend on the other`s pension pot. On the drawdown side, the fund can be inherited in full (although subject to tax after age 75) whilst on the annuity side a guarantee can be put into place for up to 30 years which may provide ongoing income for the surviving spouse and for those who want a real “belt and braces” approach a 100% spouse`s benefit can be provided too.
This is an approach which answers some of the problems related to drawdown. Firstly, the investment risk, which can be significant if you get your timing wrong and also the risk of longevity. Retirees often underestimate their life expectancy and this is serious as their fund may run out. Using a combination, aims to provide a sort of segregated pot approach which means that the retiree benefits from the best bits of both products without being overly exposed to the downsides. It negates some of the problems of annuity purchase, such as inflexibility and loss of access to cash.
In terms of disadvantages, this is available at the moment from only 2 providers and since it is all under one product you will be buying both plans from the same company and it might be argued that buying separate products is preferable – although this is somewhat impractical at the moment and possibly likely to be more costly. However, the fact that the plan is all one product is also part of its strength because having everything in one place is practical and does simplify the approach; if it was split then the income flexibility probably wouldn’t be as great.
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