Retirement Income  

IFAs: Mixture of drawdown and annuities is best option

IFAs: Mixture of drawdown and annuities is best option

With annuity rates rising sharply in recent weeks, a number of IFAs said a combination of drawdown income and annuities could be the best approach.

Last week, average annuity rates hit a 14-year high, having increased by 52 per cent in the past nine months, according to data from Canada Life. 

This means the break-even point, the point at which an individual would receive their original pension back through income, has reduced by seven years, falling from 22 years to just 15 years.

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The firm explained that a benchmark annuity of £100,000 at age 65 would now pay a guaranteed income of £6,873 a year. This compares to £4,521 at the start of 2022.

However, Steve Perera, chartered financial planner at Britannic Place Financial Management said even with the recent increases in annuity rates, the decision as to whether or not to purchase an annuity remains an extremely personal one. 

“Some people suggest that you might want to purchase an annuity in order to have a secure income to cover life's essentials,” he said.

“However, most people have this to some extent already in the form of their inflation-proofed state pension.

“Whether you need a greater level of secure income will largely depend on what your level of expenditure is, what other assets you have and also what sort of legacy you want to leave for your beneficiaries.”

Perera added: “As ever, personal finance is more about the personal than it is the finance."

Annuities fell out of favour in the past decade or so due to low interest rates and the introduction of pension freedoms in 2015 but with interest rates having increased recently, annuities are becoming an increasingly attractive option for people who take regular income from their drawdown pension. 

Inflation-linked annuity rates have also seen an improvement over the past nine months, with rates improving by 77 per cent.

Fabian Taylor, partner and chartered financial planner at Page Kirk Financial Services, said: “Annuities provide a guaranteed income for life, which removes the uncertainty of whether a drawdown pension will last throughout retirement. 

“However, annuities lack the flexibility of drawdown. Using a mixture of drawdown income and annuities could be the best option for the majority of retirees. 

“The annuity could cover essential expenditure, such as household bills, while drawdown could be used to cover discretionary expenditure, such as eating out at restaurants or going on holiday.”

Taylor explained that with additional interest rate rises by the Bank of England likely, annuity rates could increase further.

“So the dilemma for people considering an annuity now is that rates could be higher in just a few months’ time,” he said.

“A way around this dilemma could be to buy annuities in stages, securing income to meet the expenditure requirements as you need it.”