In 2008, Quantum Advisory launched adapt, a form of capped income drawdown available to members of occupational DC schemes, as an alternative to traditional annuities. It allowed members to take their 25% tax-free cash allowance over time up to age 75 by taking ad hoc sums or using their tax-free allowance to top up their income
Under income drawdown, members’ pots remain invested to benefit from any return on investments in a tax-favoured environment. Any funds not used are available to be passed on to members’ dependants when they die. While this would not offer a guaranteed income, restrictions were put in place to limit income, so that the risk that income would have to be reduced under adverse investment or economic conditions was minimised. This was way ahead of its time, with nothing similar made available to other occupational schemes at that time.
Roll on ten years and many occupational scheme members can now benefit from pensions freedoms that were introduced in April 2015, with forms of income drawdown almost being the norm compared to annuities.
So how successful has the adapt facility been? The first member to take the plunge and opt for adapt did so in April 2009. This member chose to take their full 25% tax-free cash as a lump sum (around £10,000), and used the remaining pot (around £30,000) to provide an annual income (£1,267). Fast forward to their 9th annual renewal and they have seen their income increase by a tasty 37% (now £1,738) and their pot is currently slightly higher than the amount originally left after tax-free cash (now £32,000) and therefore still available for their dependants when they die.
With examples like this, it’s no surprise that for the clients of Quantum that have introduced adapt, it has proved to be the more popular choice amongst retiring members compared to annuities. It is worth noting that not all cases will be as successful as this example, as a member’s investments can go up as well as down whilst using adapt.
Quantum Advisory is now looking to introduce a new simplified model of adapt, giving members the choice of an income of 3%, 4% or 5% of their pot values per annum, at a lower charge to the member that the original version.
Daryl Morris, Assistant Consultant at Quantum
daryl.morris@quantumadvisory.co.uk