Many people think the best time to buy an annuity is when they are older. Of course there are situations when this is right, but there is room for a more diverse view. And that is to perhaps think of the annuity as an asset class.
Consider how much time is spent trying to recreate what an annuity does using investment to mimic the same level of security. Where this comes undone, is that annuities can generate income with no investment or volatility risk.
Use of an annuity allows the client to re-apportion their remaining equity holdings, and allows a more aggressive demeanor for pure growth.
Let’s be clear though, this isn’t suggesting that annuities are the answer for everyone. This is about how an annuity can be used to bolster sustainable income.
Forget 4%. Let’s get personal.
In April 2018 the Institute and Faculty of Actuaries published their report[5] on how a combination of drawdown and annuity could affect the risk of running out of money in retirement.
They concluded that the main factors that determined sustainability were the age at which a client entered drawdown and started to withdraw income. For example, a client aged 65 could withdraw income at 3.5% and would have a sustainable income.
Their findings showed that higher withdrawal rates were more likely to exhaust the fund and the client would run out of money between 85 and 95.
The Institute’s findings suggest there is a place for an annuity alongside an invested solution. There is no need for a client to give up all flexibility, and a secure underpin removes some if not all longevity risk.
Summary
It is clear that advisers are placing the highest priority on the issues facing clients in retirement; mitigating risk and preserving capital whilst delivering income.
However, the challenge is one of finding a way to mitigate income volatility rather than a complete focus on capital volatility.
What is also clear is that decumulation in retirement has a different set of challenges to the accumulation stage, and maintaining the same investment strategy for both invites difficulties that could be avoided.
Adopting a robust advice framework specific to decumulation allows for an investment strategy that can adapt and widens the focus for what lies ahead for retired later life.
Advisers are at the centre of this revolution in retirement thinking; retirement will be a huge part of most people’s lives, and as such needs the focus, consistency and surety that a de-risked decumulation strategy can offer.
Read our new Think article ‘De-risking retirement income strategies.’
Tony Clark
Proposition Marketing Manager
'This is a Just Paid Post. The news and editorial staff of the Financial Times had no role in its preparation’
[1] Drawdown governance – how much income are people taking?, Royal London, June 2016
[2]https://www.moneymarketing.co.uk/issues/26-january-2017/annuities-down-but-not-out/
[3] Retirement Outcomes Review, FCA, July 2017
[4] New Model Adviser, How advisers are building centralized investment propositions, July 2016
[5] Can we help consumers avoid running out of money in retirement? – Institute and Faculty of Actuaries, March 2018
