Advice and the wider at-retirement market

The annuity, or whatever the term post April 2015, will still form an important part of planning for income in retirement for a large number of retirees, according to Richard Williams, director of The Annuity Bureau from JLT.

Mr Williams says: “It is still the only product that provides a guaranteed income for life and its relevance depends upon a person’s requirement for guaranteed income, their attitude to investment risk and capacity for loss on their retirement income.

“For the large part, however, an annuity is unlikely to be the sole source of retirement income for the majority going forward as people look to the provision of more flexibility with guarantees applying to their minimum income requirements only.”

Mark Stopard, head of product development at Partnership, says what is key to the future of annuities is advisers will now need to look at retirement income in a slightly different way. It is no longer simply how to get the most for your client but rather what do they need to survive and what can they afford to lose.

With some people having very modest retirement savings, this may well mean that they need to put a larger proportion of their pension into a guaranteed product – such as an annuity – while others will have more scope for flexibility and growth money to enjoy.

In addition, he says when they get older, they may no longer wish to be as involved in their investments, spend as much on travel and activities and have gifted as much as they want to their families.

At this point Mr Stopard says it might make sense to use the remaining fund to buy an annuity which will provide them with additional income for the remainder of their lives.

Advisers will always, however, need to fully explore the alternatives to an annuity.

The state will provide a basic state pension, in the region of £7,500 per year for many. The best alternative to an annuity is to increase the guaranteed income from your state pension by using your pension fund to defer taking it for up to seven years, says Alan Higham, retirement director at Fidelity Worldwide Investment.

Typically Mr Higham says this will give a guaranteed income more than double the best inflation linked annuity rate - at the moment state pension is uprated 10.4 per cent per year deferred, with this set to drop to 5.4 per cent in 2016 - and in excess of 30 per cent more than the best flat rate annuity.

Other alternative options include:

1) Taking all your pension fund as cash.

Aviva’s Mr McQueen says clients who believe they are well placed to manage their money through retirement could take all their pension fund as cash. This option gives them total control but it also comes with risks.

Mr McQueen says your client will be required to decide where to invest their money and to estimate how long they may live. He says: “These are difficult judgements that should be considered carefully.”

Some taking all of their money may seek to provide a retirement income with it, just without recourse to a specific ‘at-retirement’ income product, such as by buying a buy-to-let property that would provide a steady income stream.

2) Using income drawdown option.

This allows your clients to keep the bulk of their pension money invested in their pension and to enjoy continued growth, but to withdraw money over time to provide a retirement income.

Mr McQueen says this flexible option will require your clients to carefully manage their money over their lifetime to avoid it running out before they die. This additional control is attractive to many.

Within a drawdown contract, funds drawn as income will be taxed as such and from April there will be now limits and pensioners will be left to manage their own funds to the extent that all of the fund could be taken as cash at any point after age 55.

3) Equity release.

Often controversial in the past, equity release allows your clients to release money that is tied up in their home without moving. They can either borrow money, which is secured against their home (called a lifetime mortgage), or sell part or all of their home (called a home reversion scheme).

These options can give a lump sum, a regular income, or both. In effect, your client is selling part of their house to the equity release provider in return for a loan or income.

Aviva’s Mr McQueen says opting for equity release is a significant decision which should not be taken lightly.

The viability of all alternative options to annuity for each retiree is likely to be determined by the following, according to Partnership’s Mr Stopard:

1) The persons attitude to risk.

2) Their interest and knowledge of financial services.

3) The size of their pension pot.

4) Individual aspirations and obligations.