- What is sequencing risk?
2. How can it be reduced?
- Regular withdrawals amplify poor returns experienced in the early years of a drawdown plan which increases the possibility that the funds will run out soon.
- Take less income during periods of poor performance
- Utilise rising equity glidepath strategy
- Calculate and use a safe withdrawal rate
- Use an investment strategy that has volatility protection
Give reasons why a previous CETV might reduce
- A previous CETV was enhanced by trustees
- Scheme funding has deteriorated
- Life expectancy has reduced
- Higher equity returns leading to a higher discount factor
- Lower inflation leading to lower revaluation/lower projected pension/lower escalation and higher annuity rates al resulting in a lower capitalised value being required.
What are advice requirements for GARs?
- Advice required where transfer value exceeds £30k
- If only safeguarded benefits are GARs then doesn’t require PTS involvement
- Personal recommendation required but no requirement for comparison set out n COBS
- Once GAR has expired, the benefits are no longer considered to be safeguarded
What is a bridging pension?
- Additional amount of scheme pension paid to a member who draws their benefits before SPA
- Stops at the point member reaches SPA
- Enhancement will be tested against LTA
What are the benefits and drawbacks of pension increase exchange?
Benefits:
- Higher initial income
- Higher PCLS
- Higher spouses pension
- Benefit those with reduced life expectancy or spend more in early years
Drawbacks:
- Member may live past ‘break even’ point
- Higher value tested against LTA
- May affect state benefits
- Inflation might be higher than expected
- May push member into higher tax bracket
What is a safe withdrawal rate?
Quantity of money which can be withdrawn each year, for a given quantity of time, including adjustments for inflation, and will not lead to portfolio failure (where failure is defined at a 95% probability of depletion to zero at any time in the specified period).
- 4% indexed with inflation over a 30 year period
What are the stress tests that should be used when cash flow forecasting?
- Permanent loss of asset
- Need to increase income
- Large adhoc withdrawals
- Inflation higher than forecast
- Living longer than expected
- Investment returns lower than forecast
About seeing how long the funds are going to last
What are the effects of rising prices on real income over 20 years?
2% - 1/3
3.5% - 1/2
5% - 2/3
