Taking a retirement income in phases has become the latest trend at a time when pension pots are being squeezed more than ever.
Whether this means easing into retirement while also working part-time, entering into phased drawdown or buying a series of small annuities in order to keep the pot invested, the name of the game is flexibility when annuity rates are so unattractive.
But these rates are not simply unappealing; they have been hitting all-time lows. This past summer, yields on 15-year gilts, upon which annuity rates are based, bottomed out at 2 per cent, the lowest since records began in 1703.
While gilt yields have improved since then, they still stand at 2.24 per cent, a far cry from the 4.21 per cent yield seen in January 2011. The result has been a significant decrease in the income an annuity can provide and, in the three months between 1 July and 30 September 2012, rates for conventional annuities dropped by 7 per cent. Since August 2009, rates overall have fallen by 20 per cent.
Such figures make for grim reading, but experts in the at-retirement market say there are plenty of ways to maximise income and avoid being locked into a lifetime annuity with a low rate.
While a conventional annuity offers a lower-risk way to achieve a guaranteed income in retirement, its lack of flexibility and the fact it is exposed to an inflationary risk makes it unattractive to some.
As a result, more and more people are seeking alternative ways of structuring their retirement income to keep their options open. Taking a retirement income in stages, rather than all at once, can have a positive effect in terms of investment returns and death benefits, as well as creating an income that can be changed when needed.
This could take the form of phased retirement, where someone continues to work part-time while also drawing a small income from their pension pot through an annuity or drawdown plan. Alternatively, the same ends can be achieved through a fixed-term or asset-backed annuity that allows for a flexible income. In many cases, the objective is to allow as much of the pension pot as possible to remain invested so it can benefit from potential investment growth.
“Because we’re all living longer, managing your assets in retirement is more important; perhaps more important than ever before,” says Ian Price, divisional director of pensions at St James’s Place. Income needs in retirement are not straight-lined, he adds, saying that spending is higher during the early stages of retirement, tapering off as people grow older, and then peaking again if there are care needs.
Phased retirement is gaining in popularity because it allows income to be taken in segments. It means the investment pot can continue to remain invested, allowing time for potential additional growth should extra needs arise. It also allows the option to buy an annuity at a later date, perhaps at a time when rates have become more attractive.