Inflation could halve income in retirement

Source: Sara Davidson, Every Investor

Conventional annuities pay a higher starting income than inflation-linked annuities but over time inflation can erode 50% of your purchasing power.

MGM Advantage analysed various retirement income options to see which could potentially offer the best way to counter the effects of inflation eroding your retirement income.

By modelling four options: conventional annuity, inflation-linked annuity, an annuity increasing at 3% a year and an investment-linked annuity, the company has worked out the total income from each over a typical 22-year retirement.

Inflation-linked or escalation options, although protecting your purchasing power from the ravages of inflation, offer a much lower starting income than conventional annuities. The total income over time is also less than conventional annuities, typically between 5% and 24%.

Investment-linked annuities by contrast can potentially offer the best of both worlds, with a flexible income which can initially match or exceed a conventional annuity, and the ability to help protect your income from inflation through the returns from equities.

"Inflation remains a key issue for people considering retiring, who find themselves caught between a rock and a hard place with low annuity rates and inflation running above target. Nothing disintegrates under the glare of inflation like a fixed income,” said Andrew Tully, pensions technical director at MGM Advantage.

To read the full article from Every Investor, click here.

Larger pension withdrawals given green light

Over 55s can dip deeper into their pension pots following a recalculation by the Government.

Retired savers taking an income from pension pots still invested in the stock market will get a significant boost in October, it was announced today. The maximum withdrawals on so-called income drawdown policies will be lifted by hundreds of pounds.

Hundreds of thousands of retirees have chosen to go into drawdown at retirement rather than buy an annuity, which turns a pension pot into a fixed income for life.  Drawdown, which is available from age 55, keeps you invested in assets such as shares, bonds, and property while you take a steady income. This means your money has a chance to grow – but equally you could lose out if markets crash.

To read the full article from the Telegraph, follow this link.

Investment-linked annuities - a flexible approach

Andrew Tully explains how, by offering a flexible income similar to income drawdown, investment-linked annuities could be ideal for older clients.

Source: Investment Life & Pensions Moneyfacts

Income drawdown has had a tough couple of years, with sales falling and regular negative media coverage. But, helped by the Government’s decision to reverse income to the old 120% level, reasonably healthy investment markets and low annuity rates, the outlook is more positive. And that’s good as drawdown is a valuable tool for advisers and clients.

But while drawdown is suitable in some situations it does have weaknesses. A key one being the increasing risk capped drawdown customers face as they move through their 70s.

So it’s important people consider when and how they will leave drawdown. And that’s where investment-linked annuities can be very useful. They allow people to maintain the investment exposure and income flexibility they have been used to, while also taking declining health into account and reducing risk by benefiting from the cross subsidy available within an annuity. Investment-linked annuities offer people a flexible changeable income, in a similar way to drawdown. Maximum income for a healthy individual is broadly similar to drawdown.

But annuities can also take health and lifestyle into account, which means the many people whose health deteriorates during their time in drawdown can get a significantly higher income from an investment-linked annuity.

In addition, one of the key benefits of an annuity, mortality cross-subsidy, has an increasing importance as people grow older. On death any remaining fund - after death benefits are paid - is pooled for the benefit of other annuitants. This is the reason why annuities can pay out a guaranteed income even when someone lives beyond their expected lifespan.

With investment-linked annuities the benefits of the mortality cross-subsidy are built into the product as yearly bonuses, and this allows customers to reduce their dependency on investment returns. For example, if we assume an income drawdown customer would  need a 6% yearly investment return to maintain their income, an investment-linked annuity would only need a return of around 4% for someone who entered the contract at 70 and lived to 85. For someone entering at 75 and living to 90 the difference is even more stark, with only a 2.5% investment return required – as the cross-subsidy ‘makes up’ the difference (i).

Income drawdown can be hugely beneficial for some clients. But it is unlikely to be a suitable contract for the majority of older customers. An investment-linked annuity can offer much of the same flexibility as drawdown while also offering a higher maximum income to the many who are suffering from some impairment. And, crucially, the benefit of cross-subsidy can greatly reduce the investment risk for these older clients.

 (i) Calculations by MGM Advantage. Income taken 100% of GAD tables, same charges for both contracts. For professional advisers only.

The full article is available in the September edition of  Investment Life & Pensions Moneyfacts.

A fundamental misunderstanding of annuities?

 Source: Mike Morrison, Money Marketing

 

There has been a lot of noise in the press recently about annuities. The need for advice or not; the need to consider factors other than just the initial rate (spouse provision, death benefits and inflation proofing); the crossover point at which an annuitant will get back the full value of their pension fund. Age 82 has been quoted as the age at which full value will be returned and 90 to get good value.

It is difficult to believe that annuity rates were somewhere around 16 per cent in 1990, with the comparable rate today being something around 5 per cent.

At historic rates a degree of value was set but it has been a downhill journey ever since.

I am often asked if I have any feeling for the future of annuity rates. It is obviously difficult to say with certainty but the following factors do not look positive:

• Greater longevity
• The underwriting of annuities taking poor lives from the annuity pool
• More people with larger funds doing income drawdown and taking large funds from the annuity pool
• Gender discrimination rules
• Solvency requirements for annuity providers
• A continuing low-interest-rate economy, as recently announced by the Bank of England.

As I write, I note that gilt yields have risen to their highest level since 2011 and this could well be reflected in annuity rates but by very little.
 

Annuities have been around for a long time and for many years were the only way of converting pension funds into an income stream. When this was at 16 per cent this was not bad but at 5 per cent it does not look so good.

The article contains further information on average annual change in annuity income since 1998, the fall of average annuity rates, and projected increase in life expectancy at age 65.  To read the full article from Money Marketing, follow this link.

Will annuity rates keep rising?

Rising gilt yields should carry a silver lining for those looking to buy retirement income through an annuity. 

What does the future hold for annuity buyers? One the one hand, rates have improved dramatically in recent months; on the other there are fears that the Bank of England will keep a tight lid on interest rates, which could mean that annuity rates will struggle to go any higher – or could even start falling again.

To assess what is likely to happen, we need to look at how annuity rates are tied to other important benchmarks in the financial markets and what has caused the recent improvement. Then we’ll see how likely it is that this rise will continue.

•  Why gilt pricing is so crucial to pensioners?
•  Where are gilt yields going now?
• So what next for annuity rates? 

To find out more, read the full article from The Telegraph by following this link.



Author: Richard Evans, The Telegraph

'Annuity rates must increase 6% to support delay'

Annuity rates would have to improve by at least 6 per cent over the next couple of years to make any delay in purchasing a retirement income worthwhile, MGM Advantage calculated.

 

The lost income from delaying your annuity purchase by two years could take between 37 and 41 years to recoup if annuity rates don’t improve, provider warns.

MGM Advantage has analysed whether it could pay to delay your annuity purchase in the hope that rates will continue to improve and you might increase your income in the future. 

Andrew Tully, pensions technical director of MGM Advantage, said: 'We have seen annuity rates improve over the first half of the year, from their historic lows in 2012, but the long-term outlook for rates is uncertain.'

To read the full article from FT Adviser, click here.