What is a formation? It refers to how players in a team are positioned on the pitch and are decided according to how defensive or how attacking a side wants to be. Football formations play a crucial role in the success of a team. for context, you the client own the football club (Pensions and investments), hire a manager (financial planner), the manager (financial planner) deploys a formation (financial plan) to help you achieve your financial objectives. Just like in football, a formation is a tactical plan (financial plan) that determines how your financial planner will deploy all available tools to support you in achieving success. A formation (financial plan) is a way of organizing players (savings, pension, investment) into different positions to achieve specific objectives. The formation chosen by a team can have a significant impact on the outcome of a match.
There are a number of retirement options as shown below
Taking a cash lump sum is discounted for the purpose of our comparison. Here we liken three types of formation to the retirement options available. Annuity is (5-4-1 defensive formation), Flexible Drawdown (3-4-3 Attacking formation) and Hybrid (4-4-2 balanced formation).
Annuity (5-4-1 defensive formation)
The 5-4-1 formation is a defensive formation that emphasizes a solid defensive structure and disciplined positioning. An annuity is a retirement contract that is backed by an insurance company and provides a series of future income payments that are guaranteed in exchange for present-day capital investment. It is less risky with a known amount of income in retirement that is fixed for life in the case of a traditional annuity.
Advantages of Annuity
- An Annuity is the only solution that can guarantee you an income for life.
- You can choose to provide for your partner or spouse when you die and opt for an income that increases each year (indexation) at a cost.
- You can select an annuity that will boost your income if you suffer from a medical condition or lead a lifestyle that could shorten your life expectancy.
Disadvantages of Annuity
- Buying an annuity is an irreversible decision that cannot be changed.
- Generally, no payment is made after your death, although there are options that can provide payments to spouses and/or dependents.
- Payments from an annuity are guaranteed, you will not benefit from any potential market growth.
- If you want an income that increases with inflation this can be expensive to buy
Within the formation, you can play tactical decision at the start by picking from the variety of styles within the formation this would depend solely on you the client.. There are different types of annuities. They range from short/fixed term annuity, impaired life annuity, enhanced annuity or variable annuity. Your personal circumstances and advice will enable your financial planner to determine what suits you best.
Flexible Drawdown (3-4-3 Attacking formation)
The 3-4-3 formation is a highly attacking formation that has been used successfully by many top teams across the world. Flexible retirement income is often referred to as pension drawdown, flexible drawdown or flexi-access drawdown and is a way of taking money out of your pension pot to live on in retirement. It can give you more flexibility over how and when you receive your pension. The value of your invested pot can go down as well as up, which means the income isn’t guaranteed and you could run out of money.
Advantages of Flexible Drawdown
- You will have control over your savings and how they are invested.
- You can manage your money with the aim of generating further growth or to beat the effects of inflation.
- You can make changes to the income you receive.
- You will be able to pass any remaining funds on death to your loved ones.
Disadvantages of Flexible Drawdown
- Pension drawdown income is not guaranteed and there is a risk that you may run out of money in retirement.
- If your investments perform poorly you may need to reduce the income you take.
- You will need to regularly review your investments to ensure you are still on track.
- If you plan to buy an annuity later in life, annuity rates may be lower than they are currently.
Within the formation, as the name suggest. There are a few tactical decisions at the start, during and at the end depending on your circumstances hence the term “flexible” drawdown. Just like the formation can be played in several different styles. There are different ways to drawing an income and it ranges from partial pension drawdown, income drawdown, drip feed drawdown. You also have an option of style which ranges from cash buffer style, natural income distribution, Asset/liability matching (Hybrid), and pot investing. Your personal circumstances and advice will enable your financial planner to determine what suits you best.
Hybrid (4-4-2 balanced formation)
It is a balanced formation that can be used in both attacking and defensive strategies. This formation is known for its balance and flexibility, as it can be used to control possession or sit back and defend. A combination of an annuity and pension drawdown often provide the balance of having the best of both worlds. The principle here is that an annuity or annuity-style product is purchased by the client as a trustee investment within a Sipp. The income from the annuity is then paid into the Sipp cash account and can be received directly by the client into their bank account or reinvested within the SIPP if it is not needed. This way, the client can turn the income they receive on and off depending on their varying needs rather than receive income regardless of whether it is needed.
Advantages of Hybrid retirement income option
- You will have a level of guaranteed income although less than income available from using your funds to purchase an annuity.
- You can manage the other element of your pot which remains invested in drawdown.
- You have a degree of flexibility as you can increase or lower the income from the flexible drawdown element.
- You will be able to pass any remaining funds from the pension drawdown elements on death to your loved ones
Disadvantage of Hybrid retirement income option
- It can be seen as a complex option for some clients.
- It could also prove to be expensive particularly where the funds within the pension drawdown element have been exhausted.
- Buying a traditional annuity is an irreversible decision if splitting your pension pot to utilise a hybrid approach.
- You will require a decent size pension pot to make this option work.
This will require ongoing advice with less flexibility as compared to flexible drawdown option. If a short-term/fixed term annuity used it may be considered expensive should future annuity rates falls. The exposure to the market on the drawdown element also makes guaranteed long term income prediction difficult. Your personal circumstances and advice will enable your financial planner to determine what suits you best.
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