“Previously everyone had to buy an annuity by the age of 75 but that is no longer the case,” says Dean Mirfin, group director at Key Retirement Solutions. “Similarly people who have small pension funds worth below £18,000 currently do not have to buy an annuity.”
Generally the majority of people will want some form of guaranteed income before the age of 75 and so will buy an annuity, he notes. Exceptions would include people who are still working or those who have larger pension funds.
These clients may have little need for guaranteed income and would prefer to protect the value of their capital for the benefit of their beneficiaries instead, making them less suited to annuities.
The alternatives to annuities are income drawdown and so-called ‘third way’ products.
Drawdown, where your client draws an income from a portfolio of investments, enables clients to decide the level of income they want while their fund remains invested.
There are two variations: flexible drawdown where you can draw as much or as little as you like each year, and capped drawdown where the maximum you can draw is set by government limits based on a three-year review.
Stephen Lowe, director of external affairs at Just Retirement, says: “Subject to the cap, if applicable, both [options] give flexibility to vary the level of income withdrawn from the available pension pot, and like investment linked annuities, drawdown arrangements enable the client to retain investment exposure whilst taking income.
Third-way pensions products, which are often referred to as variable annuities or unit-linked guarantees, fit in between annuities and drawdown, offering the chance to keep an iron in the stock-market fire but still offering a guarantees of either income, capital or both.
Alan Higham, chairman of Annuity Direct, explains that drawdown preserves the capital which can then be passed on in full to a spouse or after a 55 per cent tax charge to the estate.
“It offers the prospect of better returns from investments which could mean better inflation protection or a higher income than from a guaranteed annuity,” he argues.
“A capped drawdown is subject to a three-year review where the maximum possible income could see a client’s income fall sharply if investments have performed poorly or if gilt yields have fallen significantly.
“Someone who needed to take the maximum income from drawdown in order to meet their basic needs would be exposed to a significant short term risk of loss of income which would need to be carefully assessed before such a policy could be considered suitable.
Mr Mirfin insists that generally alternatives to annuities are only suitable options for clients with bigger pension funds due to the costs involved.
“Minimums vary from provider to provider but roughly they are only suitable for those with funds worth £100,000 or more. They are more flexible and provide greater choice for clients. The clear risk with drawdown is that the fund can run out.”
