It’s been four years since the introduction of Pension Freedoms, which fundamentally changed the pension planning landscape - and blew a £7bn hole through the annuity market (chart 1).
Encouraged by greater freedom, more and more pension savers took advantage of the ability to draw down from their savings pot when it suited them, and invest however they liked.
In the light of this new world of choice, the traditional exchange of your pension pot for a guaranteed fixed income for life took backstage. It seemed like a gamble on living forever with very limited flexibility.
While politics and the media played their part in turning this view into received wisdom, the reputation of annuities wasn’t helped by interest rates at an all-time low, and longevity on a seemingly upward path.
It’s no wonder that annuities saw their popularity and market share plummet.
Now, however, there are signs that the outlook for annuities is changing.
Underlying economic factors, including improving annuity rates and stalling average longevity rates, are helping to reverse the downward trend in annuity sales.
Suddenly, annuities don’t appear to be such a bad deal.
After all, there are no other options which offer a guaranteed income for life.
Uncertainty elsewhere only makes the certainty annuities offer more attractive.
Unsettled political and trade environments, plus a global glut of debt, have the potential to lead us into a period of greater volatility in equity markets.
The uncertainty that creates is dampening the allure of drawdown as the only choice when starting to plan for retirement.
So with this in mind, should advisers be taking annuities more seriously as part of their planning for clients?
It can be a tricky subject given the bad press annuities have had - and they won’t always make sense for every client at the point of retiring.
In all cases though, partial or full annuitisation is a valuable topic of discussion later on in retirement.
Here are a few situations where it’s particularly worth talking about annuities with your clients:
One of the most common thoughts about annuities is that they are ‘bad value for money’.
The chart below illustrates the capital required at various ages to generate a level income of £10,000 per annum from a balanced investment portfolio (PIM Strategic Passive, Risk Grade 6). We can compare the cost of immediate annuitisation against the capital required to generate the income from drawdown, at various target levels of probability of success. Chart 2 shows that, after age 70, it is actually cheaper to buy an annuity than to achieve the same amount with drawdown at any level of certainty from 50% or more. The price you pay for certainty is lost flexibility.
It doesn’t need to be a stark choice of either an annuity or drawdown - a blend of the two can often be the most effective way of meeting clients’ income and capital needs in retirement. And this can be achieved in easy stages over time, as circumstances develop.
Advisers need a clear view of the risks of any strategy when it comes to choosing and blending drawdown and annuity.
Whether considering annuity for more cautious clients, in combination with drawdown for clients as they get older, for wealthier but much lower risk female clients, for clients with low capacity for loss or for clients with high levels of loss aversion, Parmenion’s Income Manager Tool (IMT) can compare alternative and combined strategies, now and in the future.
IMT can calculate the future cost of the lifelong income you plan to secure for your clients. Available free of charge for advisers using the Parmenion platform, it has the power to underpin professional, robust annuity and drawdown recommendations, and then help keep your plans on track.
If you would like to find out more, or see how IMT works, please get in touch.
“The above article is intended to be a topical commentary and should not be construed as financial advice from either the author or Parmenion Capital Partners LLP. If a client wishes to obtain financial advice as to whether an investment is suitable for their needs, they should consult an authorised Financial Adviser. Past performance is not an indicator of future returns.”
Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact your financial adviser.