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A place for guaranteed income in an invested world

The complexities of ensuring that retirement funds last a lifetime has become a central focus for many people.

Having the freedom to access pension funds has led to a seismic shift in purchasing behaviour, with many people remaining in drawdown when they would have previously chosen guaranteed income (GIfL) provided by an annuity.

However, how many truly understand that by remaining invested they also continue to assume all of the risks, particularly longevity. Is it time to reconsider how GIfL can work as part of a retirement portfolio when income is needed?

Chasing a Sustainable Withdrawal Rate

Given the sheer volume of money that has been pouring into drawdown and platforms since pension freedoms, it won’t be too long before the pent-up demand for income starts to manifest itself. Clients will be looking to advisers to provide a decumulation strategy that enables them to withdraw the level of income they choose, allowing for capacity for loss and ensuring the funds will never run out.

This is a tall order when you consider that often there is an expectation that the invested retirement fund will be able to provide all of this. But should it?

Annuities have long been the product of choice if a client had no capacity for loss and that they are only worth buying when the client is ‘old enough’.This is where the thinking needs to be updated.

What we have now is the ability to provide a personalised rate based on the specific circumstances of the individual, so for example, height and weight, postcode, marital status, and the amount someone drinks. An individual doesn’t need to be ill to get an increased rate.

So why is this important? Because it fits into the puzzle of sustainable withdrawal rates.

Every client that switches on income from their drawdown plan will have their own idea on how much they need. But what happens if they really need 5%, but can only sustainably withdraw 3.5%?

Let’s look at three different retirees, using a range of health and lifestyle conditions*. 

The rates for a healthy 65 year old (averaged from December 2017 to May 2018) show that they can achieve a lifetime income rate of over 5%.

This tells us it’s time to start looking at GIfL based on the income rate the client can achieve rather than their age.

To blend or not to blend?

Let’s address the obvious objection; the capital used to purchase GIfL means not only disinvesting, but is ‘lost’ if the client dies early.

The capital never has to be ‘lost’, as GIfL can include death benefit options built into annuities. The tax treatment is the same as drawdown. So the argument that the money has to die with the annuitant is no longer valid. The income figure would be slightly lower however, as this reflects the cost of the benefit.