Most of us have experienced the frustration of running for the train only to see the doors close just as we reach the platform.
We start to wonder whether we would be on our way if the traffic lights had turned green a few seconds earlier or if we had not taken that phone call. Timing is crucial to so many aspects of life and small differences can have a big impact. Retirement income is no different, but how do you mitigate the effects of bad timing?
The perceived wisdom that most of us would buy an annuity at retirement was torn up by the 2014 Budget. The move away from these long-established products is already apparent, with the industry reporting sales down more than 60 per cent year-on-year, and research indicating that just 2 per cent of advisers believe annuities will be the dominant retirement income option in 2025. Barely two months in, the exact shape of the new retirement income market is still unclear, but there are early signs of change, with the number of drawdown contracts doubling over a year.
It is easy to see why flexible drawdown is proving so popular, as the removal of strict rules governing how much income an individual can take each year means people can stay invested, but with freedom over how much income they take, continued access to their savings pot and the ability to change their plans at any point.
However, this freedom and flexibility poses challenges, not least because the amount of income an individual can safely take will be determined to a large extent by when they retire and the financial markets they retire into. There is also longevity risk to consider as nobody knows exactly how long they will live and most people will want to keep a buffer of savings in place for later life.
It is easy to see why flexible drawdown is proving so popularLet us take the example of an individual with a £300,000 pension pot who opts to take a 25 per cent tax-free lump sum of £75,000 at age 65 and then wishes to take a set annual income of £13,600 on the remaining savings through flexible drawdown.
In the hypothetical scenario whereby markets grew steadily each year at 2 per cent, the individual would be able to take an income of £13,600 until the age of 85, around the average life expectancy, at which point the savings would be exhausted. In the scenario whereby markets grew at 4 per cent the income would last to age 92.
