Pensions  

How a mix of products can help in one's retirement planning

  • Describe how annuities can be helpful
  • Describe the importance of holistic financial planning
  • Describe how fixed term annuities work
CPD
Approx.30min
How a mix of products can help in one's retirement planning

With Brexit negotiations once again dominating the headlines, fears about which course of action the government might take are contributing to a wider sense of uncertainty for many Britons.

At the same time, stock markets are nervous and volatility is on the rise.

Market jitters are likely to have an impact on broader pension strategy too, with those nearing retirement potentially turning to annuities as their only sensible option in the face of so much uncertainty.

But, just like with an investment portfolio, diversification is a crucial ingredient in today’s modern pension landscape – and advisers are best placed to help retirees achieve this.

Flight to safety

Annuities, which in their simplest form provide a guaranteed level of income for life, became far less popular in the wake of pension freedoms.

This 2015 legislation gave retirees significantly greater control over their pension pots and opened up more options for savers beyond those that had emerged since April 2006, when compulsory annuity purchases were scrapped.

The latest data from the Financial Conduct Authority shows that in the second half of the 2017/18 financial year, sales of newer drawdown products (which allow pensioners to keep their pots invested and draw income from them) continued growing at a faster rate than traditional annuities.

Drawdown sales were up 8 per cent compared to the same period the year before, while the total amount pension savers put into drawdown products grew by 27 per cent to £11.1bn.

Overall, pension savers ploughed £22.4bn into drawdown products during the entire 2017/18 financial year.

This compared to a much smaller 1 per cent increase in annuity sales over the second half of the 2017/18 financial year, with the amount of money put into these products falling 7 per cent to £2.1bn.

For the whole financial year, a total of £4.3bn of pensioners’ money went into annuities.

This does not mean that an annuity should not be used as part of an adviser’s toolkit for their retiring clients though.

Many now argue that annuities are set to stage a major comeback, partly because of the better rates on offer.

Compared to just two years ago, the guaranteed income that can be secured from an annuity with a £100,000 pot has risen by 23 per cent from £4,495 to £5,551.[3] Not only that, but the security and guaranteed income they offer is becoming more appealing as political uncertainty increases.

A multi-faceted plan

What retirement actually means in practice has changed dramatically in just the past four decades. In the 1980s, a typical retired couple had usually only been married once, often for many years, and also lived in the same property for much of their adult life.

Their employment also tended to be stable, with much of this generation working in the same job for life, and often rewarded with a defined benefit pension as a result.

Nowadays, people nearing retirement are likely to have had several jobs, not all of which will carry with them defined benefit schemes, and for some, a costly divorce may have impacted their financial wellbeing.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. What was happening to the amount of money put into annuities over the second half of 2917/18??

  2. Why are annuities set for a comeback?

  3. What is currently the upper limit of guaranteed income for a £100,000 pension pot?

  4. Why do retirees need a holistic retirement plan?

  5. With a fixed term annuity, once the contract has expired, there is no money left, true or false?

  6. What role does equity release have in retirement planning?

Nearly There…

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

You should now know…

  • Describe how annuities can be helpful
  • Describe the importance of holistic financial planning
  • Describe how fixed term annuities work

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