View more on these topics

Alternative thinking

Falling annuity rates mean we must consider other options

This is a difficult time for those wanting an income from their pension pot. Turbulent markets, gilt yields at a historic low, falling annuity rates, high inflation and reductions in the maximum drawdown income all make it an extremely complex and volatile time to be making crucial long-term decisions. But choices need to be made as most people still need a retirement income as they reduce their working hours or retire completely.

The income we can get from lifetime annuities has plummeted and locking into a low annuity rate has another potential downside as inflation is likely to have a significant impact on future income. It is crucial that those buying a lifetime annuity make sure they get the best possible rate and shopping around and ensuring all medical and lifestyle conditions are high-lighted is key.

The traditional alternative of drawdown is also facing more than its fair share of challenges. The Government’s decision to reduce the maximum income to 100 per cent of the equivalent annuity was based on the long-term view that people should not strip out excessive income after age 75, run out of money and fall back on the state. But it has come at an inopportune time, with gilt yields falling from above 4 per cent a year ago to around 2.5 per cent now. This translates to around a 20 per cent drop in income for a 65-year-old male. Add in the general decline in fund values and that explains the 40 per cent or 50 per cent income reductions being seen by some of those reaching drawdown reviews.

Fortunately, we now have other options in the retirement market. Variable annuities guarantee a minimum level of income through the use of derivatives although they can be expensive. Fixed-term annuities are becoming increasing popular as a way of deferring the purchase of a lifetime annuity in the hope that rates will increase or personal circumstances change, allowing a higher income in future.

Investment-linked annuities are another option and the Government has confirmed the 120 per cent maximum income available from these contracts will continue. That is because, unlike drawdown, customers cannot run out of money.

There is a minimum income guarantee and, as annuities, people benefit from mortality cross-subsidy which allows a higher income to be with-drawn without increasing the risk of depleting funds.

These newer options give alternative choices to the traditional routes and will be valuable to many clients. More will benefit from using a combination of solutions as they go through the various phases of retirement. Whoever you are advising, it is worth making the most of the new range of solutions out there.

Andrew Tully is pensions technical director at MGM Advantage

Recommended

AWD appoints private client advice manager

AWD Chase de Vere has appointed Paul Fox as private client advice manager for the north. Fox will be accountable for the delivery of AWD advice in its Birmingham, Glasgow, Leeds, Manchester, Newcastle and Preston offices. He will also take responsibility for business quality standards, adviser relationships and recruitment. Fox was most recently LEBC director […]

Abbey to expand buy-to-let range

Abbey for Intermediaries is to launch four new buy-to-let products and cut the rates on its existing range by 0.2 per cent. On January 17, the lender will launch a two-year fixed rate at 3.39 per cent, for a 2.5 per cent fee and up to 60 per cent loan-to-value. AFI will also launch two […]

Graphic Content – August

Given the release of employment data from the US on 5 August, we wanted to focus on employment data in this month’s Graphic Content. The Graphic Content below shows us that young and middle-aged workers were hit the hardest by the Great Recession and have never caught up. Since the job market started to recover […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Leave a comment