Annuities and drawdown

There has never been a more daunting time to be considering retirement.  The financial markets are in a constant state of flux.  Inflation, although seeing recent falls, will come under pressure with the US drought potentially causing food price spikes.  Annuity rates are at an all time low, with the latest findings from the MGM Advantage Annuity Index revealing annuity rates having fallen by 14% since June 2009.  And clients in drawdown are seeing income falling as much as 50% following reviews.  It must leave you wondering how much worse it can get.

Clients approaching retirement may be finding their options unappealing.  They can defer taking income from their pension.  But for many this isn’t an option, they need the income now.  For others, deferring may help if markets recover, but there is also a risk in delaying annuity purchase. In the meantime, the bigger question (especially for those invested in lifestyle protected funds) may be will annuity rates recover?  Although there will be some upward movements, I believe the overall trend for the next few years will continue to be downwards.  There are simply too many factors at play putting pressure on annuity rates.  Over the next year or so we will see the introduction of equal rates (pushing down male annuity rates when currently 82% of annuities are bought by male clients), Solvency II increasing insurers’ capital requirements, ever-increasing longevity, and low gilt yields put under even more strain by the recent round of quantitative easing.

Many clients will be best advised to consider enhanced annuities, if they have the lifestyle or medical conditions to qualify.  Our data reveals the difference in income between the top enhanced annuity rates and bottom standard annuity rates come to 43% for men and 46% for women. Enhanced annuities have clearly come of age - last year they rivalled conventional annuities in the advised space for top spot in the sales charts.

The other traditional income option has been drawdown, but this has also seen its fair share of woes recently.  Falling markets, new (lower) GAD tables, and lower income limits of 100% (rather than 120%) has put some off entering drawdown, and many of those who have just gone through their five-yearly review have seen their maximum income levels fall dramatically.

Fortunately, the time when the retirement income market consisted primarily of conventional annuity and drawdown is long gone. The size of the market has increased exponentially over recent years, as more people approach retirement with a defined contribution pension pot.  Products such as flexible annuities are fast attracting followers, with ABI statistics show investment annuities now make up 7.3% of the advised retirement market¹, compared to only 4.7% in 2009¹. This is in part due to their ability to offer some form of guaranteed income to clients, whilst the funds remain invested and are able to benefit from any surges in market performance. Over the long term this provides the potential to stave off the effects of inflation and help clients retain the same standard of living throughout retirement, or even the possibility to grow their retirement income in real terms.

Choosing the best retirement income for your clients is not an easy task. One single solution may not suit a client’s myriad of needs, and instead advisers will be putting together a retirement income portfolio using several of the different product solutions on offer. Although falling annuity rates and the new drawdown rules makes life tough for those approaching (and in) retirement, it’s still possible to devise a retirement income solution that will help meet your clients changing needs for the whole of their retirement.

1 ABI stats, 2009 and first quarter of 2012, by premium