Good retirement planning separates the strategy from the tactics. By this I mean retirement planning is more of a strategic decision which looks at identifying a client’s longer term retirement objectives as well as establishing the appropriate amount of risk that can be taken. The tactical part is deciding what particular products or options can best achieve the strategic objectives.
It is at the tactical level that the real difference between the packaged and DIY approaches become important and the following things should be compared:
Annuity purchase options
Tax efficiency
Investment strategy
Death benefits
Overall costs
The table bellow compares these options:
| Hybrid products | DIY | |
| Annuity purchase options | In-house annuity rates are used which may not be the best in the market | The annuity is purchased on the open market |
| Tax efficiency | Hybrid plans have an advantage because the annuity income is paid into the Sipp bank account. This means that any unwanted annuity income can be retained within the Sipp | The DIY option can be set up on a phased retirement basis and depending on the options this could be even more tax efficient that hybrid |
| Death benefits | As the annuity is purchased as an asset of the Sipp there may be an advantage in dealing with annuity death benefits | The normal rules for death benefits apply. |
| Investment strategy | The hybrid plans favour passive funds and have a limited range of funds | This is where the DIY may have the edge because there are few if any restrictions on the range of investments. |
| Overall costs | For smaller pension pots the cost are probably less than for DIY | The costs will reflect the complexity of advice and additional administration |
Generally speaking, the decision where to go for a hybrid or DIY solution will be influenced by size of fund, investment strategy and complexity of advice.
Hybrid plans are better suited to smaller funds because of the continuance of having both annuity and drawdown options available within a single plan. I understand that there are some relative large funds going into hybrids so they clearly are suitable for larger funds. The DIY approach will normally be more expensive not least because of the additional administration of arranging more than one plan.
Perhaps the biggest differentiator is the investment choice. There is a strong case for passive investments and managed portfolios but advisers and their clients who want a different investment strategy will be attracted to the greater range of investments available through other Sipps.
Finally, the complexity and sophistication of advice will be a factor. Possibly an even better solution can be obtained through the use of phased retirement where tax-free cash is taken in stages and used to supplement the income from annuities or drawdown. With the hybrid schemes it is necessary to take all the tax-free cash at the outset so true phased retirement is not an option.
