Andrew Tully, technical director at Canada Life, says as well as customer outcomes the FCA would also be looking at how clear client communications are, and making sure clients are given transparent information around the choices they have, the risks they face for each choice, and whether a combination of options may present the best outcome.
That allows people to guarantee a certain level of income each month, alongside state pensions and perhaps a DB income. But alongside that the client can have a flexible pot that can be used for one-off expenses and to pass on to the next generation if not required.
Tully explains further that buying annuities in phases through retirement also avoids locking into an income today when potentially a higher income may be available over the next few months or years, as annuity rates can be volatile.
He adds: “The large majority of people buying an annuity buy a level annuity where income doesn’t increase. But with inflation currently running at 10 per cent or so, that level of income is falling in real terms, so will buy less next year than now.
“Leaving part of the pension invested can be a hedge against inflation – a personal inflation pot that will hopefully grow over time. Additional income can be taken from that pot to top up the annuity in future years, or an additional annuity can be bought.”
Gibb says the FCA could potentially also require advisers to consider annuities and hybrid options to a greater degree, as well as require them to more rigorously stress test market downturns and sequential loss.
According to Smith-Hughes, a key area the FCA is likely to concentrate on is whether advisers have been paying appropriate consideration to the key risks of drawdown, for example, longevity risk, inflation risk, sequencing of return risk and the risk of running out of money.
To back up his point he points to the FCA finalised guidance on DB transfers (FG21/3) where there are a lot of themes that also apply to income drawdown.
Ima Jackson-Obot is deputy features editor of FTAdviser
