Pension Freedom 

Retirement has become a journey

This article is part of
Guide to retirement income pathways

Retirement has become a journey

Retirement income has been transformed in the past few years, ever since pension freedoms was launched in 2015.

For something that used to be a fairly straightforward transaction, buying an annuity has now become far more complex - there are thousands of options to choose from, and many variations of product type.

It is all dependent on the client's financial situation, what type of investment they have, how they see their retirement panning out and what kind of family commitments they have.

One of the biggest changes when planning clients' retirement income is the fact that it is now an ongoing journey.

When retirement meant buying an annuity and living off that, in the pre-pension freedom days, it was simply treated as a one-off event.

Value of annuities

This was one of the biggest criticisms of annuitisation - which was the main option for most people - that one's circumstances might change.

Clients may have bought an annuity and be taking an income from that, but during the course of their later life there was nothing that they could do about it financially if they required a different set of finances.

In the immediate aftermath of pension freedoms, many people rejected the concept of annuities completely, embracing the new-found freedom and ability to access all sorts of interesting drawdown products.

But sentiment has come full circle and now people are starting to realise that annuities have a value, especially when markets are volatile.

Vince Hughes-Smith, head of business development at Prudential, says: "If you're moving from accumulation to decumulation, the issue is sequence of returns risk.

"If you're taking an income from a given fund, let's say you invest all your money in Japanese equities because they have higher growth potential. If you're deriving an income, you are crystallising your loss in deriving that income.

"If the funds drop 30 per cent, and the pot falls from £100,000 to £70,000, and you're taking an income from that, you're crystallising a loss on that."

He continues: "The way that drawdown works, if you're taking an income from that portfolio, it makes it much harder to catch up, because you've got to recover the missing 30 per cent.

"This is a risk that is specific to people who are in drawdown."

Blending

It is for this reason that many people are using a blended solution - a mixture of annuities and drawdown. 

Mr Hughes-Smith says: "I think the critical question is: what's the base level of income you need to pay your bills?

"You have a couple who are saying [it is] £1,500 a month. You don't want to take any risk to that £1,500 a month. You can see what the additional spending is that you would like to be able to take, and you can find a means to do that.