We also now know that, as we get older, our cognitive abilities diminish. Frankly, we are more likely to make poor financial choices without realising that we are exposing ourselves to greater risk as we get older. We are more vulnerable to pensions ‘liberation’ scams for example.
It is also a well-known fact that in later retirement, perhaps over the age of 85 today, retirement income needs tend to level off and begin to reduce - perhaps as mobility issues begin to play a factor in holiday plans for example.
In later life, clients do not want to fret about the price of their weekly shop, or indeed the state of the prospects for their FTSE 100 or Nikkei shares.
After all, we have had 13 major declines in stock markets as defined by more than 10 per cent losses in value (and five of those 13 were 20 per cent plus drops) since 1926. It would be terrible if the next decline wipes 20 per cent off your drawdown-based assets when there is no other flexible income source to turn to for lifestyle and inheritance funding, or even your day-to-day essentials.
So, as we get older, perhaps from age 75 years onwards, advisers ought to be thinking on behalf of clients about beginning to convert a larger percentage of the remaining pot into an annuity. At that sort of age annuity rates are of course much more favourable.
If any ill health has shown itself by then they may well be entitled to an enhanced annuity with even stronger retirement income prospects.
Remember, there is no magic age to turn the rest of the drawdown into an annuity.
A much better approach is to start with some annuity and to buy a series of further top-up tranches of annuity throughout retirement. That avoids the timing risk of switches from drawdown to annuity. And the prompts for the next slice could be to take unrealised capital gains, seize a sudden lift in annuity prices, or simply worsening blood pressure, which will improve a fully underwritten annuity quote.
Used in this way, a gradually shifting combination of annuity and drawdown provides a valuable de-risking service to the client.
After all, in retirement it is not limiting volatility of capital values that really matters but limiting volatility of retirement income when you are most dependent on that income in later life.
Securing a stable income is the key thing to work on retaining once you leave the world of paid work behind.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
