View more on these topics

Stephen Lowe: Developing the gold blend for retirement

Solutions providing customers with a guaranteed income for life have been the bedrock of retirement planning for decades but now flexi-access drawdown has become available to all. Both options have obvious pros and cons but the beauty of the new rules is that there is nothing to stop retirees seeking the best of both worlds: a gold blend of the two.

So how might this blend perform when compared against investing a pension fund solely in either a guaranteed income for life or drawdown solution? We do not know what will happen in the future but if the last decade is anything to go by then the idea definitely has merit.

We considered the case of a male retiree in 2006 with a £150,000 pension fund. The environment for those heading into retirement was very different then to today, with interest rates 10 times higher. The rate on a standard guaranteed income for life solution was 7 per cent for a 65-year-old, generating £10,500 each year. We compared the results of investing the fund fully in drawdown against splitting the fund 50/50 between drawdown invested in a balanced mixed-asset fund and guaranteed income for life (see table below).

Just Retirement graph

In the first couple of years, on the basis of a 7 per cent withdrawal rate to match the guaranteed income for life income available, the pure drawdown solution would have delivered £270 more income in 2006 and £169 extra in 2007. The effect of the credit crunch then kicked in and, in 2008, the income from the 50/50 blended solution exceeded the pure drawdown by £1,187.

Although share prices have since recovered to reach new highs, the pure drawdown solution has failed to regain lost ground. Since 2008, the 50/50 blend has produced more income than pure drawdown, with the gap between the two growing.

While the choice of investment fund was the same for both solutions, the fact only half as much was originally invested in the 50/50 blend (£75,000 instead of the full £150,000) has reduced the impact of the 33 per cent drop in value as a result of poor investment returns, charges and income withdrawals.

On a cumulative basis, the 50/50 blended solution delivered £95,304 income over the 10 years, which is 64 per cent of the original £150,000 investment. That compares to £85,608 for drawdown, which is 57 per cent of the original investment.

These figures will not come as a surprise. By spending half the pension fund on guaranteed income for life, the retiree has insured themselves against stockmarket falls so, when they did happen, the impact was reduced.

The point we think these figures illustrate is that those people who need to take income from their pension should consider the maxim “hope for the best; prepare for the worst”. Flexibility can prove expensive amid the inevitable stockmarket gyrations that tend to occur when investing over the medium to long term.

The beauty of blending in this way is that it can be tailored to the individual retiree. After taking into account other guaranteed income sources such as state and final salary pensions, the retiree may still need a further top-up to reach their personal minimum income requirement: the amount they need to ensure the bills are paid and essential expenditure covered.

If, in our example, the retiree needed to a top-up of £5,250, then using a 50/50 blend would give the customer the security of receiving that despite the market downturn. The world probably looks very different to the full drawdown investor whose 7 per cent withdrawals look unsustainable. The £7,074 it generated in the last year is above the £5,250 top-up requirement but, at that withdrawal rate, the fund value looks to be in a nosedive.

In this situation, reminded of the capacity of financial markets to fall as well as rise, he could consider spending some of the remaining drawdown fund on purchasing further guaranteed income. He will get the going rate for a 75-year-old and be more likely to qualify for an enhancement than when he first retired. In fact, his best bet could well be a blended solution. It is not too late. The lesson of this particular past is that blended solutions are the future.

Stephen Lowe is group communications director at Just Retirement



Tony Wickenden: Retirement planning pointers for the year ahead

Last week I started a look at the content of the Autumn Statement directly or indirectly relevant to financial planners. I focused on some of the pension-related changes but did not have room to cover an importantly reassuring announcement regarding inheritance tax. The Government introduced backdated legislation in the Finance Bill 2016 to ensure that […]


Osborne unveils secondary annuities overhaul

The Government has unveiled details of a new secondary annuities market to be introduced in April 2017, including a U-turn on plans to block providers from buying back guaranteed income streams from existing customers. Policymakers had originally planned not to allow providers to buy back annuities, citing the risk of insurers exploiting a “captive market” […]


Low paid Govt staff could miss out on pension tax relief

Auto-enrolment schemes at both the Department for Work and Pensions and The Pensions Regulator apply the net pay model for tax relief that the Government has warned employers against using. People earning over £10,000 but under the starting rate of income tax – which currently sits at £10,600 – miss out on a 20 per […]


Govt comes clean on Pension Wise performance

Pension Wise guidance appointments are costing almost £500 each, Government data reveals. The figure comes to light after policymakers bowed to pressure from politicians and the industry to boost transparency around the industry-funded guidance service. The Government has faced criticism from across the sector for failing to produce data on Pension Wise, which is paid […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm