The report, sponsored by UK insurer Partnership, suggests that advisers with clients holding less than £250,000 ($355,053, €323,244) in assets should consider the hybrid options in light of the legislative changes that have hit the UK annuity market.
Blended vs hybrid
Explaining the difference between a blended and hybrid retirement plan, Defaqto’s insight consultant Gill Cardy describes a blended plan as using two separate product wrappers to provide a combination of guaranteed income and drawdown.
“It has always been possible to combine various pension and investment products to create a bespoke solution, which delivers just the right combination of benefits for each client,” she said.
“However, sourcing each individual component, potentially from several product and investment providers, can be time-consuming and can result in potentially complex product and investment strategies.
“Additionally, where investment strategies form part of the retirement solution, often as part of a drawdown plan, it can be important to monitor the portfolios, reviewing fund performance, switching out of underperforming investments, rebalancing funds to maintain desired asset allocations, and monitoring returns to ensure capital remains in place to meet the client’s objectives.
“This process can be both time-consuming and expensive, both initially and on an ongoing basis,” Cardy added.
Defaqto citied the Financial Conduct Authority’s March 2015 final report, ‘Retirement Income Market Study’, saying: “We expect to see more new products emerging, for example combining features of annuities and income drawdown.
“Consumers will welcome this increased flexibility, however there is a risk that greater choice and more complex products reduce consumer confidence and appetite to shop around, thereby weakening competitive pressure.”
Alternatively, Cardy says the benefits of hybrid retirement plans combine guaranteed income and drawdowns together in one product wrapper.
She said through using simpler pension and investment solutions, a hybrid plan made it easier to manage the costs of both product and advice at implementation and monitoring stages.
“The essential point of the hybrid plan is that it is combining the various elements of the retirement solution in one single product wrapper.
“While hybrid solutions have been designed to make more flexible retirement options available to those whose pension funds were not usually deemed to be at an appropriate level, wealthier clients who wish to mitigate investment and income risk may also appreciate the simplicity and cost structure of such a simple offering, which also combines flexibility with security.”
Defaqto said the main consequences of looking at hybrid products, like the Enhanced Retirement Account from Partnership, were twofold.
First, the opportunity to leave a larger proportion of the pension fund invested to secure a future income stream or additional ad hoc lump sums for withdrawal.
Second, that the minimum required level of income has been secured means there is a reduced risk of needing to draw on the invested capital, unless as part of a clear financial plan.