Is choosing between an annuity and drawdown still relevant?

“For most clients it won’t be an either/or choice, but getting the balance right between the two,” Lowe says.

“Retirees face two big problems: their investments may deliver poorer than expected returns, and if they take too much income their pension may run out if they live a long time. Uniquely, annuities address both investment and longevity risk.”

Indeed, Lowe describes how annuity income “keeps flowing” with no ongoing decisions however long someone lives, or however their ability or willingness to make financial decisions declines.

He says: “Guaranteed income for life can also help estate planning. If all or the majority of the bills are covered, then they are free to spend or give away other income or assets.”

For most clients it won’t be an either/or choice, but getting the balance right between the two.Stephen Lowe, Just Group

Lowe also warns of the possibility that poor investment performance in the early years of a drawdown strategy can leave a fund so depleted, that even above-average growth later is insufficient to stop the value of a portfolio spiralling downwards, if a saver continues to draw income from the pot.

So what might the aforementioned balance look like?

Fiona Tait, technical director at Intelligent Pensions, says clients with sufficient pension savings may find themselves experiencing three separate retirement stages:

1. Mid-50s to early 70s: clients have a long-term investment horizon, and the ability to adapt to future changes is likely to be a priority. Drawdown is the most suitable option.
2. Late 60s to late 70s: clients start wanting an element of security to cover their core expenses, and use part of their pension fund to purchase an annuity underpin. During this stage, they hold both drawdown and annuity plans. 
3. 70s and above: a client’s income requirements are fairly settled, enhanced annuity rates become available, and the resultant annuity income is sufficient to meet the client’s needs. Annuity becomes the most suitable option.

While retirees do not have to decide from the outset how they will use all of their pension savings, Retirement Line’s Ormston says that if a plan can be put in place, this helps ensure the appropriate investment mix can be chosen.

He adds: “If we know in advance that a client is going to adopt a ‘flex first, fix later’ approach, we know the customer is going into drawdown and may well be in drawdown for 20 years or more. That will inform the investment decision.

“If someone is going to adopt a ‘secure some, stay supple’ approach, the client will have secured a certain standard of living through the combination of a lifetime annuity and the state pension. Funds in drawdown might therefore be invested with this in mind.”