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Billy Burrows: Retirement options don’t need to be black or white

Every conference I attend has someone talking about the need for innovation in retirement income.

Having watched product developments over the past 20 years, it comes as no surprise the elusive new plan that sits halfway between an annuity and drawdown has yet to gain universal acceptance.

Indeed, the so called “third-way products” are being overlooked by advisers. The road to this point is littered with the relics of unit-linked guarantees and with-profits annuities. Who remembers the brave but unsuccessful attempt by Lincoln to sell the i2Live variable annuity?

The last man standing in the innovation race is the fixed term income plan. These solve the problem of how to obtain a guaranteed income without losing control by purchasing an annuity and retaining flexibility without taking the risks associated with drawdown.

The plans come in two parts: the income that is paid for a set period and the maturity amount, which is a lump sum paid back into the pension pot at the end of the term.

The unique and most appealing feature is the maturity amount, which can be used to pay a lump sum, purchase an annuity or remain invested under drawdown rules.

So, how can these plans be used in retirement planning? Here are four examples.

The first is a person who wants a guaranteed income but is concerned about low annuity rates and the fact their health may deteriorate. They invest and take the same income as would have been paid from an annuity in the knowledge they might benefit from higher rates or an enhanced annuity at the end of term.

The second is someone wanting a relatively high level of secure income to bridge the gap between retirement and the start of the state pension.

The third is to de-risk drawdown in later life and the fourth is a less frequent issue but nevertheless important: a retiree with other sources of income on the border between basic- and higher-rate tax who wants to cash out a pension over several years and avoid paying higher-rate tax.

It is difficult to innovate the basic annuity because the unique advantage of the income for life comes from the mortality cross subsidy and adding bells and whistles reduces the benefits.

But most retirement objectives can be met by a combination of annuities and drawdown. As such, it is not more product innovation we need but more innovation in the advice process.

William Burrows is retirement director at Better Retirement

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