Erstwhile annuity specialist MGM Advantage has developed a calculator for advisers to help clients understand the risks of ditching annuities, based on its own research which it claims shows those who rely on drawdown have a 50 per cent chance of outliving their fund.
The firm’s analysis shows that if at age 65 someone decides to use drawdown to match the income their pension pot would generate through an annuity, there is a 50 per cent chance they will live long enough to run out of money.
It modelled various scenarios and, based on analysis of “industry standard longevity tables”, has developed a calculator for financial advisers to use with clients.
In a statement it cited an example of a 65-year old man with a £100,000 pension pot. MGM said at current rates the man could generate an income of around £6,000 a year from an annuity for the rest of his life, no matter how long he lives.
By comparison if he took the same annual income using drawdown, which would require a 5 per cent annual investment return after charges, he would run out of money at age 92.
Andrew Tully, pensions technical director at MGM Advantage, cited figures showing healthy people approaching 65 have a 70 per cent chance of making the average life expectancy of 86 and a 50 per cent chance of living to 92.
MGM has revealed it is branching out beyond its previous annuities specialism ahead of April, as predictions abound that sales will be severely hit. It was forced to make 80 redundancies in the wake of last year’s Budget, as it revealed it would be launching a “radical new proposition”.
Mr Tully said: “There is a lot of talk about using drawdown, but retirees need to be made aware there is a real risk that their money could run out early.
“While many people may think they won’t live long enough to worry about their money running out, the statistics show this is not true. That’s like flipping a coin to find out if they will run out of money in retirement.”
Mr Tully suggested that a blended approach - using an annuity to pay the bills and drawdown or other options for spare cash - is both tax-efficient and sensible from a planning perspective.
“Financial advisers have been promoting this sort of approach for years, but I am concerned that in the shake-up of the pensions market people will not access advice and therefore may make poor choices.”
Recent research from Hargreaves Lansdown among 6,912 investors found 72 per cent of them still want a guaranteed income in retirement, but intend to use a mix of annuities and drawdown to generate this income.
Meanwhile, an Axa survey found that 58 per cent of advisers plan to recommend to their clients a blended or mixed approach from 6 April, while 21 per cent said they plan to recommend drawdown more.
