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Creating sustainable income in uncertain times – the value of guaranteed income
Retirement has changed – and with it come added complexity and considerations for advisers to navigate. In 2020, the average age to leave the workplace was 65 for men and 64 for women, an increase from 63 for men and 61 for women in 1992.1 Most people underestimate their own longevity and are therefore less likely to see the value of insuring against running out of funds before their death. Clients have very different expectations about retirement, and their objectives are unique. This reinvention of retirement introduces complex challenges including longevity risk, sequencing risk, managing the trade-offs between income needs, supporting dependants, inheritance goals and care costs. Our research found that millions of people across the UK are fearing that the long-term impact of today’s rising living costs could see their life goals delayed or even missed altogether.2 With increased economic uncertainty and volatility in the markets, creating a sustainable income for clients in retirement is now more challenging than ever. Natural longevity protection such as Defined Benefit (DB) pensions is dwindling, and advisers will need to consider how they can replace this, as fewer clients will have it as part of their portfolios in the future. Clients will also be more dependent on their Defined Contribution (DC) pension savings. According to the latest Pensions Policy Institute (PPI) report, economic difficulties, policy changes and increases in longevity have all combined to make hosting DB pension schemes more economically difficult for employers.3 Against this backdrop, what actions can you take to help clients create a robust retirement strategy?
Managing risk in a client’s portfolio
Including a guaranteed income within a portfolio, provides essential longevity protection. The below diagram identifies the ‘4 Ls of retirement income’. This is a very useful way to visualise a client’s retirement income needs. A guaranteed income as part of the first L can act as a layer that provides longevity protection, creates certainty, and therefore can protect other assets, by allowing more flexibility to draw on those only when needed.
Key objectives in retirement
Source: The 4 L’s of retirement income planning, Wade Pfau
The level of the underpin needed is determined by the client’s wealth and capacity for loss and can be used to support multiple retirement objectives. Once longevity risk is mitigated, there is greater flexibility for other higher-risk strategies within a client’s portfolio. By combining guaranteed income with drawdown, you can offer your clients the best of both worlds. The flexibility of drawdown, as well as the certainty and security of guaranteed income. It is therefore clear that the benefits of adding an annuity to a drawdown portfolio extend beyond providing security and peace of mind.
Considering annuity rates in the current environment at different ages – the importance of a fully underwritten annuity quote
| Age | Standard rate – Annual income | Unhealthy BMI – Annual income | Diabetes – Annual income |
| 67 | £6,571 (6.57%) | £6,627 (6.63%) | £7,096 (7.10%) |
| 75 | £8,311 (8.31%) | £8,407 (8.41%) | £9,059 (9.06%) |
| 80 | £10,545 (10.65%) | £10,651 (10.65%) | £11,706 (11.71%) |
Note: Rates included in the table were taken 09/09/22 and based on a fund value of £100,000.
An annuity-drawdown blend can deliver better outcomes
A binary approach to drawdown or annuitisation no longer exists. There is a growing body of empirical evidence, that demonstrates how integrating annuities within a retirement portfolio can deliver better outcomes. The PPI has identified six retirement needs/desires archetypes for clients in retirement; it concluded that most archetypes will benefit from a combination of access to flexible withdrawals, and guaranteed income.4
Similarly, the Institute and Faculty of Actuaries modelled a range of strategies involving drawdown and annuitisation, and concluded that by adopting an integrated strategy, including a degree of annuitisation within drawdown, “consumers can potentially generate a larger overall income from their pension pot”.5
Evidencing the sustainability of income is a crucial factor in every review meeting. A layered and phased approach to annuitisation can improve overall outcomes for a client in retirement. Now is the time to consider how you can incorporate guaranteed income into your clients’ portfolios.
1 Over-50s in the labour market, Centre for Economics and Business Research, August 2022
3 How will future pensioners use guaranteed income products? Pensions Policy Institute, September 2022
4 How will future pensioners use guaranteed income products? Pensions Policy Institute, September 2022
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