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
