Retirement income: what are the options?

Advisers can recommend a level, escalating or inflation-linked annuity. Although it would seem logical to seek inflation protection, income starts at a much lower level and takes a long time to catch up. According to the Money Advice Service, it takes 12 years for an escalating annuity to reach the same payout as a level one and 23 years for the total income paid to become equal.

“For most people, the long timescale to the ‘break even’ point and low starting income is a negative for inflation-linked annuities, as most folk want to maximise income whilst ‘younger’ and more mobile,” says Joss Harwood, chartered financial planner at Eldon Financial.

The retirement planning universe goes beyond basic annuities and drawdown, something more advisers are cottoning onto

Enhanced annuities

Enhanced and impaired annuities are one obvious way for clients to gain a higher income, dependent on their level of health. Such annuities pay a higher annual income to those with health conditions or lifestyles that will likely reduce their lifespan relative to a healthy peer. Examples of qualifying conditions include cancers and heart conditions, through to less severe ailments or lifestyle conditions such as high cholesterol or smoking.

Statistics show there is a stark difference in take-up of enhancements between advised and non-advised sales.

“In 2012, only 25 per cent of people purchasing conventional annuities took out an enhanced/impaired annuity but it is estimated that over 50 per cent of people are eligible for one,” says Mark Stopard, head of product development at Partnership.

“Indeed, 50 per cent of people who shopped around – by, for example, speaking to an adviser – took out this type of product compared to just 4 per cent of those who did not.

“This suggests that intermediaries play a vital role in educating people about the benefits of enhanced annuities. At first you might think it is tricky for an adviser to bring up this subject as no one wants to be reminded that their lifestyle or carefully managed medical condition may have an impact on their longevity.

“However, advisers tell us that when clients realise that this could mean a significant uplift in their retirement income, they are generally happy to share as much information as possible.”

Alternative annuities