Prior to the 2015/2016 tax year (when ‘pension freedoms’ changes became active), it had been routine for members to wait until reaching a fixed retirement date before accepting one of two options; a tax-free lump sum and the remainder used to purchase an annuity, or just to purchase an annuity.
The pension freedom changes brought in new options to allow funds to remain invested with the ability to take regular or ad-hoc drawdown payments. There was no longer the requirement to simply purchase an annuity.
Post-pension freedoms, members have the flexibility to choose exactly how they would like to receive their income. However, the onus should be placed on trustees to incorporate a valued retirement product in their defined contribution (DC) offering.
This, however, is not always the case.
Testing the market
BlueSky have surveyed a range of trustees and schemes to see what is being offered to members. The results suggest that DC schemes in general are still leaving the responsibility to the member to go to the open market and buy an annuity. Often this choice is being made by default, with members not aware of the choices they now have.
Income drawdown effectively allows you to treat your pension pot like a bank account, offering the ability to fund your retirement in a number of ways. You can invest your pension savings to generate a regular income and withdraw lump sums as required. Often this approach might be a more desirable outcome than the purchase of an annuity, fixing the income payments for the life of the individual.
The results of our survey show that members often aren’t being offered products to support the full range of options available to DC members today.
So, what should pension trustees do?
The key thing is to take stock now. Assess what you are offering DC members, in terms of both products and costs, and see how they compare to the best-of-breed products today.
In 2015, BlueSky developed the first strand of its Crystal product, offering controlled drawdown at a reasonable cost; approximately half that of market rates.
The advantages to the member is that they can utilise one of four drawdown strategies, including advanced investment ideas together with the strength of BlueSky’s premium administration services, at a fixed price of 75bps per annum – BlueSky’s Chief Executive Officer, Paul Bannister, challenges you to compare that to the market! If you find your current options aren’t competitive, it’s time to plan for a change.
In the latest video, Paul discusses in further detail the advantages of income drawdown, and how you can benefit.
To learn more about how BlueSky can assist you with workplace pensions, get in touch today. Call us on 0333 321 8210 or visit our contact page to speak with a member of our expert team.