Drawdown Annual Review Report
For
XXXX
Produced XX/XX/XXXX
By [Enter Adviser Name Here]Fairey Associates Ltd
36 Church St
Great Baddow
Chelmsford
Essex CM2 7HY
Telephone: 0845 319 0005
Email:[Enter Adviser Email Here]
Table of Contents
Introduction
(i) Investment Strategy
(ii) Performance
Section 1 - Your Current Situation
Attitude to Risk
Capacity for Loss
Ethical Views
Section 2 - Your Objectives
Section 3 – Meeting Your Needs
Product Risks
Actions - Investment Review
Fund Composition – Fairey Associates 2014 Hybrid ‘XXXX’ Portfolio
Investment Risk Warnings
Regular Reviews – Enhanced Service
Next Annual Review Meeting
Payment for Services
Adviser Charges - Potential Tax Consequences
Ongoing Adviser Charge
Compliance Declaration
Financial Services Compensation Scheme (FSCS)
Cancellation Rights
Conclusion
Introduction
As part of our service agreement with you we are committed to undertaking review of your income drawdown arrangement.
Scope of Review
(i) Investment Strategy
I have previously recommended a suitable range of funds designed to optimise the potential future returns within your tolerance for risk (the degree of risk you are willing to take) and capacity for investment loss (the level of potential loss you could afford to sustain)
Different investments / asset classes perform differently to each other depending on the prevailing market conditions - this relationship is referred to as the extent to which investments are 'correlated' to each other. Investments may be positively correlated (i.e. - move in the same or similar direction) or negatively correlated (move in different directions)
Therefore, in a suitably diversified portfolio the actual composition will deviate over time from the long-term asset allocation which was established at outset
It is therefore important to consider whether any adjustments need to be made to your investments to keep your portfolio adequately diversified and consistent with your attitude to risk.
(ii) Performance
Whilst future investment returns cannot be predicted it is important to consider how the underlying investments held within your portfolio have performed against appropriate benchmarks.
This should be considered over a reasonable time horizon, however, as short term volatility / fluctuations can be due to a variety of factors not just underperformance. For example, it is important to consider performance consistency and also the investment's performance relative to its risks.
Section 1 - Your Current Situation
An important part of the planning process is that we continue to keep up to date with your current circumstances and objectives.
We discussed the fact find that I previously completed with you and you have signed to confirm that the information within this document remains accurate and up to date.
To this end you have confirmed that your personal details, your income and expenditure and your assets and liabilities are the same as before with no significant or material changes to your personal circumstances.
[Enter details of any changes in personal & financial circumstances here – if major please complete full annual review report instead]
Attitude to Risk
Your overall risk profile describes your general risk outlook and indicates the level of risk you are normally prepared to take, although you may decide to take more or less risk for any specific investment goals you may have.
As part of identifying your risk profile we discussed your answers to a psychometric questionnaire, the indicative risk score from which is enter risk profile here. However, this does not take into account other factors that will impact on the risk approach that is most suited to you.
Enter details of other considerations here, if appropriate, and agreed risk profile if different from FE ATR
Capacity for Loss
Investment Horizon
A longer investment horizon helps support capacity for loss as this gives more time for markets to recover and more scope to save to make up for past investment losses. However, this is generally less pertinent for retired people as they have less scope to save more.
Following completion of our Capacity for Loss Questionnaire, we assessed your capacity to be low/medium/high.
(Delete as appropriate)
Low -We discussed your ‘capacity for loss’ and given your level of income and the value of your other assets we agreed that you have low capacity for investment loss. This means that should your investments go down in value at any point and you choose to crystallise such a loss by gaining access to your investments it would greatly disadvantage you.
Medium -We discussed your ‘capacity for loss’ and given your level of income and the value of your other assets we agreed that you have medium capacity for investment loss. This means that should your investments go down in value at any point and you choose to crystallise such a loss by gaining access to your investments it would somewhat disadvantage you.
High -We discussed your ‘capacity for loss’ and given your level of income and the value of your other assets we agreed that you have high capacity for investment loss. This means that should your investments go down in value at any point and you choose to crystallise such a loss by gaining access to your investments it would not materially disadvantage you.
You understand that the value of your investments can go down as well as up and you are comfortable with the level of risk that you are taking with your investments.
[or enter your own wording here in relation to the discussion you had with the client around capacity for loss]
[DELETE THE FOLLOWING AS APPROPRIATE]
Cautious Attitude to Risk
The most conservative portfolio aiming to protect capital from the effects of the inflation over the long term.
Cautious to ModerateAttitude to Risk
Aimed at providing an element of capital growth over the effects of inflation over the long term consistent with low levels of risk.
ModerateAttitude to Risk
Aimed at providing rates of growth in excess of inflation over the long term and consistent with moderate levels of risk.
Moderateto Adventurous Attitude to Risk
A portfolio suitable for an experienced investor seeking returns which are significantly over inflation rates over the long term and able to tolerate higher levels of risk.
AdventurousAttitude to Risk
A portfolio suitable for very experienced investors looking for high levels of growth over the long term. This portfolio presents a very significant level of risk.
Ethical Views
You have/have not expressed any ethical preferences in relation to your investments. Include details of ethical preferences here, if applicable
Section 2 - Your Objectives
You are currently utilising capped/flexible drawdown but now wish to review whether or not any changes should be made to this arrangement.
In particular, the level of income required from this plan and the selected investments should be considered.
You did not wish to discuss any other objectives at this time, even though you may have other needs, and by not covering these, this could be to your detriment.
I have based my advice on what I believe to be complete information in relation to your current income drawdown plan and I believe my recommendation to be suitable advice. If complete information has not been provided you should be aware that my advice may have been different.
Please note further to the Budget Announcement in March 2014 the following changes were made to drawdown limits and pension legislation:
- The rates are set by the Governments Actuary Department (GAD) but for anyone entering capped drawdown after 26 March 2014 the maximum level of annual income that can be drawn is 150% of the single life level annuity, payable monthly in advance, without guarantee based on the GAD tables taking into account the client's age and the current gilt yield.
- From 27 March 2014, the minimum income requirement in respect of any application for flexible drawdown made on or after this date is reduced from £20,000 pa to £12,000 pa; and
- From 6 April 2015, it has been proposed that there should be no minimum income requirement that people would need to satisfy in order to withdraw unlimited amounts from their pension
Section 3 – Meeting Your Needs
[INCLUDE PARAGRAPH BELOW IF FULL CAPPED DRAWDOWN]
You are currently drawing an annual income of £XXXX payable XXXX (frequency) in XXXX (mode) from your capped drawdown arrangement and, having assessed your other income and expenditure, we have agreed that an appropriate level of annual income for the next drawdown scheme year will be/will still be£XXXX payable XXXX (frequency) in XXXX (mode). This equates to XX% of the upper GAD income limit.
We have agreed that this is an appropriate amount for the next 12 months because XXXXX
The shortfall/surplus of £XXXX will be addressed by XXXX.
[INCLUDE PARAGRAPH BELOW ONLY IF PHASED CAPPED DRAWDOWN - NOT CRYSTALLISING ANY MORE FUNDS]
You are currently drawing an annual income of £XXXX payable XXXX (frequency) in XXXX (mode) from your phased drawdown arrangement and, having assessed your other income and expenditure, we have agreed that an appropriate level of annual income for the next drawdown scheme year will be/will still be£XXXX payable XXXX (frequency) in XXXX (mode). This equates to XX% of the current upper GAD income limit in respect of your crystallised rights in drawdown and means that there is therefore no need at this stage to crystallise any more benefits in order to provide you with the income you require.
We have agreed that this is an appropriate amount for the next 12 months because XXXXX
The shortfall/surplus of £XXXX will be addressed by XXXX.
[INCLUDE PARAGRAPH BELOW ONLY IF PHASED CAPPED DRAWDOWN - NEED TO CRYSTALLISE MORE FUNDS TO MEET INCOME REQUIRED]
You are currently drawing an annual income of £XXXX payable XXXX (frequency) in XXXX (mode) from your phased drawdown arrangement and, having assessed your other income and expenditure, we have agreed that an appropriate level of annual income for the next drawdown scheme year will be/will still be £XXXX payable XXXX (frequency) in XXXX (mode).
However, in order to provide you with this total amount of income, you will need to designate further funds to your drawdown contract.
Your next years income from the drawdown plan of £XXXX, after designating more funds to drawdown, will comprise of a tax free cash sum of £XXXX and an income, after tax, of £XXXX.
The income drawn will equate to XX% of the maximum income that you can take from the crystallised funds in drawdown after your tax free cash has been paid.
I have recommended XX% because:
EXAMPLE REASONS
- The maximum draw of 150% has been recommended because this entails crystallising the minimum amount possible in order to target the level of income needed and therefore maximises the lump sum death benefits payable in respect of the uncrystallised pot
- A low % / no income has been recommended in order to minimise your income tax liability.
In order to target your total income requirement for the next year, a fund of £XXXX will therefore need to be designating to your drawdown contract. This means that a fund of £XXXX will remain uncrystallised and potentially payable as a tax free lump sum in the event that you were to die before age 75.
Any lump sum paid from the remaining funds in drawdown would however be taxed at 55%.
[INCLUDE PARAGRAPH BELOW ONLY IF FLEXIBLE DRAWDOWN]
You would like to make a withdrawal of £XXXX from your flexible drawdown arrangement because XXXXXXX.
Having assessed your other income and expenditure, we have agreed that this is an appropriate amount to meet your needs and you understand that the whole of this withdrawal will be subject to income tax at your highest marginal rate. I have also reminded you that as you are utilising flexible drawdown, no new pension savings should be made by you, or on your behalf, because the whole amount would be subject to an annual allowance tax charge, payable by you via self assessment.
Based on the information supplied by your current provider XXXXX, it appears that you have the following capped/flexible drawdown pension plan:
Note:- Some of the info in the table above won't apply if this is a flexible drawdown plan
We have considered whether or not it would be appropriate to convert your fund to an annuity and, in particular, we have given careful consideration to the following factors:
- The size of your fund
- Your age
- The age of your spouse/partner (delete if not applicable)
- Your attitude to risk
- Your tax position
- Your state of health
- The state of health of your spouse/partner (delete if not applicable)
- Whether or not the ability to take a flexible income remains important
- Whether or not a guaranteed income has now become important
- Whether protecting capital remains important for the purpose of providing death benefits
- Other investments and pensions that you may have
In view of the above, the main reasons that I have recommended that you maintain a capped/flexible drawdown arrangement and do not convert to an annuity now are:
EXAMPLE REASONS
- You have a continuing need to be able to draw a variable income
- You do not currently require any income
- You would like to continue to benefit from tax free growth on the invested funds and rising annuity rates (with age)
- You would like the remaining fund on your death to be able to provide for a surviving spouse; you are unsure about your spouses health so by delaying buying an annuity you do not have to make a decision regarding whether or not to include provision for a spouse's annuity.
Having established that maintaining the current capped/flexible drawdown arrangement is still suitable in your circumstances and meets your requirements, the following issues now need to be considered:
If utilising capped drawdown, the rate of return on the selected funds since the last review needs to be examined and compared to the critical yield that is required.
My findings in this respect are XXXXXXXXXX
In the event that you thought that you were approaching a time when you think it would be a good idea to purchase an annuity, then it is likely that your attitude to risk will reduce. This will mean that it may be necessary to start switching from higher risk funds into safer funds.
This is/isn't applicable in your case because:
EXAMPLE REASON
- You have no plans to convert to an annuity in the foreseeable future.
The appropriateness of the asset allocation and the selected funds need to be reviewed and changes made if appropriate. This should take account of your attitude to risk, your income requirements from the arrangement, your state of health, your age and the estimated term to annuity purchase.
Based on my review, I have recommended XXXXX because XXXXX
The level of annuity that can be secured should be appraised and consideration given to whether annuity purchase has become appropriate.
[Delete Section below if not relevant]
My research shows that the best annuity available on the open market from your available fund would be £XXXX payable XXXX (frequency) in XXXX (mode) with XXXX (providers name). These figures are based on you purchasing an annuity guaranteed for X years, with/without a XX% spouse's pension and level/escalating at XX% p.a.
For the reasons explained earlier however, we have agreed that annuity purchase is not appropriate at this point in time.
The level of income needs to be reviewed to in order to ascertain if it is still appropriate for your requirements.
Any relevant changes in legislation that govern this type of plan should be considered and changes made as a result of this if required or desired.
I can confirm that this is/isn't applicable in your case.
IF IT IS APPLICABLE, PLEASE EXPLAIN WHY
Having established that maintaining a capped/flexible drawdown arrangement is still suitable in your circumstances, I must of course remind you that there are risks associated with this route as well.
Product Risks
- A minimum level of growth must be achieved by the remaining pension fund in order to maintain its value after any income payments have been taken. If this 'critical yield' is not achieved the fund may be unable to purchase an annuity equivalent to that which could have been purchased at outset if income withdrawals had not been selected.
- This, however, is unlikely to be an issue for you if you meet the 'minimum income requirement' and are utilising flexible drawdown because you want the option to be able to make unlimited withdrawals, without cap.
- You may find that you need a higher income from the plan than initially anticipated. It may not be possible to arrange an increase depending on investment returns.
- Any investment returns may be less than those shown in the illustrations.
- Any lump sum death benefit paid from drawdown funds, other than to a charity, will be taxed at 55%.
- Should a high level of withdrawals be taken, then unless there is exceptional growth the withdrawals will not be sustainable during the annuity deferral period.
- You must appreciate that deferment of the purchase of an annuity may result in less favourable annuity rates if and when a purchase is eventually made. In addition, the investment fund may be depleted, either through investment performance or withdrawals, to the extent that even if current annuity rates are maintained, the annuity which can be purchased in the future will drop.
In particular, I have looked at and made recommendations based on: