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.
That is not just the standard monthly bills for electricity, TV, water, heating, shopping, council tax and keeping the car running; but also to cover other items that you really need to regard as vital for your sanity – like a good holiday each year.
Once these have been added up, you might want to see if you can fund these essentials out of an annuity to ensure the basics are definitely covered. Also consider the type of annuity you select. Level annuities cost a lot less than inflation-protected ones. So, combining a level annuity to cover today’s essentials with a drawdown plan to pay for the occasional bigger expenses makes sense.
The real growth assets underpinning drawdown policies should also cover future cost increases in that basket of essentials as well as providing for your clients’ lifestyle spending in retirement.
Drawdown policies
Among these lifestyle items, there may be some big ticket items which your client may not be able to put an immediate timeline or budget on.
It may be likely that within the next 10 years your client’s daughter will get married. But who would have predicted she would want to stage that wedding in Costa Rica, more than doubling any estimated bill they might have factored in?
Drawdown policies are ideally placed for irregular drawing as these items pop up. They also offer the exposure to higher growth funds, so a good deal of your lifestyle expenditure could be paid for from investment growth in the good years. You will need to arrive at a notional annual maximum drawdown amount that you are limited to in order to ensure that you do not run dry before you reach your dotage.
In a policy briefing of March 2018, the Institute and Faculty of Actuaries recommended a sustainable annual drawdown rate of no more than 3.5 per cent of the entire pot value, assuming that you are going into decumulation at the current state pension age of 65. In this scenario, a £100,000 pot in drawdown could deliver £3,500 a year.
