Drawdown 

How a drawdown-annuity blend offers the best of both worlds

  • Be able to describe the outlook for the annuity market.
  • Identify some of the advantages of using a drawdown policy for clients.
  • List the tools and apps to help clients avoid running out of money in retirement.
CPD
Approx.30min
How a drawdown-annuity blend offers the best of both worlds

It is time for advisers to look more seriously at blending drawdown and annuity income as retirement needs change and income guarantee requirements compete with the investors’ desire for exposure to higher growth asset classes.

One of the major impacts of pension freedoms over the last three and a half years is the increasing percentage of people moving into retirement who have elected to use an income drawdown policy as their primary pension decumulation vehicle, rather than purchasing an annuity, which historically had been the default choice for pension savers at retirement age pre-pension freedoms.

We saw a dramatic plunge in annuity sales from 89,000 in the second quarter of 2013 – about a year before the then chancellor George Osborne went public on pension freedoms, to 17,000 in the fourth quarter of 2016 at the notional annuity market bottom.

Back in 2014, many predicted a 70 per cent to 80 per cent decline in the annuity market and that was pretty much borne out as a healthy £11bn market in 2013 became a more ‘bijou’ £4bn one by 2016.

Pension freedoms’ strong  “you no longer need to buy an annuity at retirement” message was unfortunately being trumpeted via multiple newspaper headlines across the land at exactly the time when annuity rates were operating at all-time lows, as rising longevity rates, prolonged periods of low interest rates and quantitative easing-inflated gilt prices all worked together to suppress annuity rates – thereby pushing down the retirement incomes that annuity purchasers could hope to secure from the same sized pots a few years before.

However, what is interesting is that today the tide is turning for both annuity rates and their sales.

A combination of factors is running in favour of annuities.

Firstly, interest rates are slowly rising, as are underlying long-term bond prices. These two factors have been pushing up annuity rates for the past two years. Somewhat less expectedly, longevity gains have apparently stalled. We have now banked the easy gains from reducing smoking and the next big challenge – improving air quality – will not come easily or quickly.

Annuity outlook

The resulting outlook for annuity rates continues to look positive right through until 2025, according to RBC Capital Markets. The annuity market is rebounding, triggering increased investment in product innovation by providers.

Furthermore, the outlook for equities, we are told by market observers, is heading for a period of greater volatility, so would-be retirees may be well-advised to search for greater exposure to the guaranteed income certainty that annuities offer.

It is worth noting that right now 69 per cent of drawdown sales are advised, whereas only 28 per cent of annuities sales are preceded by financial advice. Market pricing speculations aside, there are other very good reasons why retirees should in fact be considering blending an annuity with drawdown policies to meet their income and savings needs in retirement going forward.

Let us dig into this idea a little more. Firstly, it is worth thinking about what your clients’ plans and needs are in retirement. Work with them to determine what ‘essential’ income they need for day-to-day expenses in retirement. 

CPD
Approx.30min
  1. Back in 2014, the industry predicted a decline in the annuity market of how much, which was later borne out?

  2. Mr Boulding describes the annuity market as doing what?

  3. Is the following statement true or false? "Right now 49 per cent of drawdown sales are advised."

  4. According to the FCA's numbers, the average pot entering drawdown has risen to what amount?

  5. Mr Boulding suggests ideally within your client's drawdown policy there is scope to leave a target amount for what?

  6. When their clients are what age should advisers start thinking on their behalf about converting a larger percentage of their pot into an annuity?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Be able to describe the outlook for the annuity market.
  • Identify some of the advantages of using a drawdown policy for clients.
  • List the tools and apps to help clients avoid running out of money in retirement.

I completed this CPD in

To bank your CPD please complete the form below.

What did you learn from undertaking this CPD exercise?

Why did you undertake this piece of learning?

Banked!

Congratulations, you have successfully completed and banked this piece of CPD

Already Banked!

You have already banked for this article.

To bank your CPD you must or

Register

One or more questions have been incorrectly answered,
 please review your answers and try again.

Please enter what you have learnt and why you completed this CPD.

More Pensions CPDSee my completed CPDSee all CPD

Comments