Lifetime annuities paying either standard or enhanced rates are just one of a range of retirement income options, including additionally income drawdown, fixed-term annuities and investment or unit-linked annuities.
Stephen Lowe, group external affairs and customer insight director of Just Retirement, says: “The vast majority of retirees who need to use a pension to buy an income opt for some form of lifetime annuity and usually the higher the income paid, the better it is for the client.
“Wealthier and more financially sophisticated clients who are willing to pay higher charges and have more capacity to cope with the ups and downs of the financial markets may consider alternatives, but should compare the guaranteed income from an annuity. What would be the point of taking on extra cost and risk to generate a lower income?”
He adds, however, that decisions are more difficult for those retiring who do not qualify for an enhanced annuity but who may fear due to their family medical history, for example, that they are likely to go on to experience health issues.
One alternative, argues Mr Lowe, is fixed term annuities, which pay a guaranteed income for an agreed term rather than a lifetime “allowing changes to be made at the end of the term or in some cases during the term if the client’s circumstances change”.
For clients with sufficient wealth and the appetite to take an element of risk with their retirement income, Mark Stopard, head of product development of Partnership, says advisers would need to discuss income drawdown, phased retirement and phased drawdown.
“Combining an enhanced annuity with some of these other strategies can offer a very effective, tailor-made, retirement plan for wealthier clients.”
While an annuitant can normally take 25 per cent of their pension pot as a tax-free cash lump sum, Mr Stopard reminds that if an individual’s combined pots are worth less than £18,000 or an individual pot is worth less than £2,000, they can usually be taken wholly as a lump sum.
Away from outright alternatives to enhanced annuities, Andrew Tully, pensions technical director of MGM Advantage, says advisers should look at whether their client might benefit from an investment-linked, rather than standard, option.
Investment-linked annuities set up on enhanced terms take the customer’s health and lifestyle into account in exactly the same way as an enhanced annuity, Mr Tully explains.
“Investment-linked annuities allow the flexibility to pay income up to 120 per cent of the annuity income with the ability to vary income as circumstances change. This offers people the ability to take a higher income at some stages of their retirement if it suits their needs.
“It also allows people to benefit from any growth in the investment markets over the medium to long term, which will hopefully offset the corrosive impact inflation can have on a fixed income.
“And they usually come with an underlying lifetime income guarantee for peace of mind.”
