Can inertia secure better retirement incomes?

 Source: Money Marketing, by Mark Pearson

 

A key part of the automatic enrolment ideology is that employee inertia will result in their accrual of a pension fund. While this may help the government drive people into saving, the same inertia is presumably a factor in a third of all retirees taking the annuity offered by their current pension provider without shopping around.

The Government’s aim is for individuals to create an additional pension pot and bolster their state pension entitlement, which is only likely to reduce in the future due to the effect of our ageing population. A pension pot on its own will not suffice; at some stage it must be used to provide an income.

By 2018, the introduction of automatic enrolment is expected to create an influx of 11 million new pension savers. The knock on effect is projected to treble the size of the annuity market and it is essential the annuity market properly services these customers.

In its recent consultation, ‘Better workplace pensions: a consultation on charging’, the DWP demonstrated in its four client scenarios that the lifetime effect of reducing annual management charges from, say, 1.00 per cent to 0.75 per cent resulted in a increased fund value of between 3.2 and 8.4 per cent.

In light of this, it is surprising to discover how comparitively little attention is focused on the fact that, according to the NAPF and Pensions Institute, between £500m and £1bn in lifetime income is estimated to be lost each year as a result of savers being tied into annuity rates which are not market leading. This could represent up to 8 per cent of the annual annuity market.

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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.

Retirement income guide from Defaqto

Defaqto has launched a Retirement Income Guide for financial advisers, which looks at the key issues associated with this area of financial planning to help advisers establish structures and processes that enable them to deliver compelling solutions to clients.

The guide includes:

• Guidance on understanding and addressing client retirement income options and key risks likely to be encountered during retirement planning
• Analysis of product types with a rundown of the key players in each category and related adviser considerations
• Statistical data on longevity trends
• Example annuity rates to show advisers how these might be used to frame client advice and guidance discussions.

Definitely worth a visit to their website to download a free copy of the guide.