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A break with convention

Fixed-level annuities, long considered the failsafe option, may no longer be the best solution for today’s pensioners.

With falling annuity rates, inflation hitting pensioners harder than any other group and people living longer than ever before, this is definitely the right time to question whether conventional, fixed-level annuities are genuinely a no-risk, safe option.

We all want to believe the retirement income we get from our pension savings will be enough for us to see out our twilight years in relative financial comfort.

The average 65-year-old man can now expect to live until he is 82 – meaning some 17 years of twilight. This compares with Government figures that show in the 1980s, a man could expect to retire at 63 but would probably be dead by the time he was 70.

It is great we are all leading healthier lives and living longer but this increased longevity means people approaching retirement today have a great deal more to take into consideration than did their parents’ generation.

A great deal can happen in 20 years – not just to us and our health but to the world around us. It is vital that the provisions we make for our retirement have sufficient flexibility to adapt both to changes in personal circumstances and to the economic landscape.

For most people, securing a retirement income that is guaranteed to pay out every year until they die is a top priority and conventional, fixed-income annuities have always been seen as the safe option because they guarantee to pay the same yearly income for life, with no exposure to investment risk or the risk of living too long.

However, it is vital that advisers address the risk posed by inflation – especially when you are looking to help your client fund a lifestyle that will last for the next 20 years.

Inflation hits pensioners harder than any other age group because of the things they spend their money on – utilities, for example – and the latest cost of living figures show that people aged between 65 and 74 need to find an extra £774.70 just to maintain the standard of living they enjoyed 12 months ago.

Thisismoney.co.uk has found that in the last 20 years, inflation has reduced the real value of £10,000 to £5,464.48.

For clients who remain resolute that investment risk is not for them, it is possible to include inflation-beating features with a conventional annuity but this could reduce the client’s starting income by up to 40 per cent.

Investment risk and the risk of inflation are not the same thing but they do deserve the same consideration when it comes to retirement planning.

Thankfully, more and more people are now seeking advice as they approach retirement and the industry is responding to this increased demand with new, innovative retirement solutions that allow people to make informed choices.

Asset-backed annuities, for example, can offer protection against inflation without the need to take a lower starting income. The best products can balance the desire for some security through a guaranteed income against the need to take an element of investment risk to combat inflation.

People are still looking for products that provide a level of guaranteed income, some control over where their money is invested and a way of leaving it to loved ones if they die earlier than expected.

What is changing is the willingness to accept that providing for our retirement needs a long-term financial plan. Perhaps conventional annuities are not the only way to achieve this.

Aston Goodey is sales and marketing director at MGM Advantage

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