Retirement guarantees leave many poorer, research warns

Retirement guarantees leave many poorer, research warns

Products that offer a guaranteed level of income, such as an index-linked annuity, could leave customers poorer, new research has found.

A white paper entitled ‘Retirement Guarantees – are they worth it?’, revealed that a product with what it referred to as a modest guarantee could return around 30 per cent less over the average retiree’s lifetime than a similar product with no guarantees.

It warned customers are at risk of making themselves “considerably poorer” if they choose a retirement guarantee with higher charges and more conservative investment strategies.

Milliman, a consulting and advisory firm, was commissioned by Royal London to conduct the research, as those at retirement or planning to retire face an ever wider array of products with which to fund their later years as a result of the pension freedoms.

The study used three example customers to represent “middle Britain”, and assumed each one would receive the full state pension of £8,000 a year as well as an additional £2,000 from a DB pension scheme and a DC pension pot of £100,000, and would retire at age 65.

Speaking at a Royal London workshop on the at retirement market, Russell Ward, principal at Milliman, called guarantees a “trade-off”.

“Buying too much protection or too soon can make you poorer,” he added.

In the white paper, Milliman said its analysis showed, for example, that for a retiree 20 years into their retirement at age 85 there is approximately a one in seven chance a typical index-linked annuity will be providing the same level or a higher level of income than a drawdown product with no guarantee.

But after the age of 85, the research found, the chance of benefitting financially from the guarantee increases quickly.

The report said: “Some customers will attach a high value to having peace of mind and so be comfortable to trade the possibility of significantly more income for the enhanced security a guarantee provides. However, for others this might seem too high a price to pay.”

Mr Ward told retirees to “handle with care” those products that provide guarantees. 

The research pointed out there was no single retirement product that met all of its example customers’ requirements or retirement income needs more generally.

At the workshop, Royal London’s business development manager Craig Muir voiced concerns about income sustainability 18 months on from the introduction of pension freedoms and said people underestimated their life expectancy.

He urged consumers to seek advice in order to navigate their options in retirement.