Having the freedom to access pension funds has led to a shift in purchasing behaviour, with many people remaining in drawdown when they would have previously chosen an guaranteed income for life (GIfL) provided by annuity.
However, how many truly understand that by remaining invested they also continue to assume all of the risks, particularly longevity. Is it time to reconsider how GIfL can work as part of a retirement portfolio when income is needed?
Annuities have been the product of choice if a client had no capacity for loss or if they were ‘old enough’.
However, what we have now is the ability to provide a personalised rate based on circumstances such as height, weight, marital status and postcode. An individual doesn’t need to be ill to get an increased rate.
This is important because of sustainable withdrawal rates.
The GIfL rates for a healthy 65 year old (averaged from December 2017 to May 2018) show that they can achieve a lifetime income rate of over 5%.
This tells us it’s time to start looking at GIfL again.
Blending is more than just finding a good rate, it is about shifting risks for the retiree.
By securing an underpin of guaranteed income, the adviser is able to rebalance the remaining equities, incorporating the GIfL as part of the portfolio.
To test this, we can look at replacing the bonds element of an example portfolio with a GIfL. (See full article here for examples).
This shows that the higher the level of income taken, the probability of sustaining it changes in accordance with the mix of equities and bonds held.
Now when we strip out the bonds element, and replace it with GIfL we can see that the probability curves have shifted.
Using GIfL even at higher withdrawal rates, increases the probability of maintaining income, as the volatility found in bond funds has been removed.
When it comes to providing a sustainable withdrawal rate, treating GIfL as a guaranteed asset class shows that blending works.
It is inevitable that there will be a market correction at some point, and blending in this way will help to mitigate some of the downside.
Proposition Marketing Manager