By their 75th birthday nearly half of all Australians have exhausted their pension savings . True, the Australian pensions landscape is different from the UK's. Nevertheless, this statistic should not be dismissed lightly. Drawdown is rapidly becoming the product of choice for UK retirees with more people buying drawdown than annuities, and investing more money in drawdown too .
Is drawdown a solution or a problem?
It’s not difficult to understand the appeal of drawdown. Ready access to funds, money can be invested for growth, and on death any balance can be passed to dependants tax efficiently.
What’s more, drawdown provides the income flexibility that today’s retirees need. With retirement routinely lasting 20 or more years, one thing is certain: neither clients nor their advisers can accurately predict income needs over the course of retirement. Someone may be active for more than 20 years or fall seriously ill a year after retiring. They may die after a short illness or require long-term care. If the latter, care may be provided in the home (often by friends and family at little cost) or in a residential nursing home where the costs are considerable. All these, and many more, unknowns mean that the ability to vary income in retirement is critical.
That makes drawdown a valuable solution for many people but, as the Australian experience highlights, drawdown can spell disaster if clients withdraw too much too soon, manage their investments poorly or simply live too long!
Could happiness be annuity-shaped?
Although the overall income required during retirement is likely to vary, certain expenses are fairly constant from one year to the next. These essential expenses, like gas and electricity, should ideally be covered by a guaranteed income.
Annuities still represent the only certain approach to guaranteeing an income for life. What’s more, the value of annuities isn’t measured purely in economic terms; they have emotional value too. Research has shown higher satisfaction with retirement and lower levels of depression among retirees with the greatest levels of annuitisation.
Knowing that they will receive a regular income every month is likely to encourage people to spend more freely on enjoying life. In contrast, the stress of not knowing whether you’ll run out of money before you run out of breath can cast a shadow over retirement.
Blending can offer the right balance
A blended approach, combining annuities and drawdown, can often be the right solution. On one hand, the risks of drawdown can be offset by the security of a guaranteed income. On the other, the lack of growth potential from a conventional annuity can be boosted by the prospect of higher returns from drawdown. It's what people want.
A Retirement Advantage YouGov survey asked people approaching retirement to rank flexibility, certainty, income growth and instant access in order of importance. It was no surprise to find that flexibility and certainty came out top. Most of us crave the certainty of an income that will last a lifetime but also want the flexibility to vary income from time to time (and to dip into our fund for unforeseen expenses). These needs can be met using a combination of an annuity and drawdown.
Many IFAs would naturally recommend a blend of annuity and drawdown, sourcing best of breed for each component. It is possible in theory to offer everyone a tailored solution, but in practice it isn’t viable to do so. This is where packaged products can help. They can provide a simple, economic approach to blended solutions.
The magic of packages written under drawdown rules
Some providers offer blended solutions that are simply two products sold together in a marketing package. However, the more advanced solutions combining annuities with drawdown are written under drawdown rules. This way, the annuity is an asset of the client’s drawdown portfolio, which can have significant advantages. For example:
|Feature||Traditional Annuity||Annuity within drawdown|
|Income||Healthy and unhealthy lives catered for||Healthy and unhealthy lives catered for|
|Income flexibility||None – income is paid as decided at outset||Full – income can be reduced, stopped or recommenced at any time. Excess builds up in drawdown element|
|Death benefits||No tax planning – lump sum or income paid out immediately following death||Full tax planning – death benefits paid into beneficiary's account, allowing them to withdraw in stages and minimise tax|
|Commutable income guarantee||No||Yes – remaining income guarantee following death can be commuted to lump sum and paid to beneficiary's account|
|Protect against future||No flexibility or adaptability||Flexibility to change to suit future circumstances, helping customers meet changing needs|
|Adviser future earnings||None from annuity||Yes – ad hoc/ongoing fees available if funds in drawdown|
The Retirement Account: flexibility, certainty and simplicity
The Retirement Account, introduced recently by Retirement Advantage, is a leading example of the new breed of blended products likely to become popular with advisers. It combines a guaranteed annuity, a pension drawdown facility and a cash account, all held within a single tax-advantaged wrapper written under drawdown rules.
Let’s take a look at some of the key benefits of The Retirement Account:
- Income flexibility. Your clients can take what they want from the account and vary the amount to suit their needs. They can also stop and start income payments (including income from the annuity).
- Tax efficient. If income from the annuity isn’t required for any period, the income can be paid to the cash account or drawdown without any tax liability.
Phased annuitisation. The Retirement Account allows clients to phase the purchase of annuities over their retirement. This has a number of benefits:
- Money can stay invested for longer, so it has the potential to grow.
- Growth from drawdown investments can be locked in as guaranteed income for life when needed.
- Annuity rates improve with age.
- Enhanced terms become available as health deteriorates.
- Comprehensive death benefits. The annuity can be written with a money-back guarantee (up to 100 per cent) or a guaranteed period for as long as 30 years. There’s also the option of a dependant’s income up to 100 per cent. What’s more, the guaranteed income option can be exchanged for a lump sum. And, of course, drawdown funds are available to be paid to beneficiaries.
- Minimise tax on death. The benefits payable on death can be paid as a lump sum, a regular income or a combination of the two. This flexibility means beneficiaries can mitigate the tax payable on death.
- Investment funds handpicked by independent specialists. The funds we offer have been selected by specialist independent research firm Square Mile. Investment performance, value for money and strategy have all been considered in assessing the potential for success. There is a range of active, passive and protected funds split into three categories (cautious, balanced and adventurous). Clients and advisers can sleep soundly knowing that all funds in the range are closely monitored.
- Making life simpler. As you would expect from a company that believes in the importance of advice, The Retirement Account is only available from advisers. What’s more, we’ve made the whole process as simple as possible. That means one application form, one illustration and one annual statement.
- Competitive pricing. Both the drawdown element and the annuity are priced to compare favourably with other products in the market. What’s more, you have complete flexibility to structure your fees to suit your and your clients’ preferences.
The Retirement Account combines the flexibility of drawdown with the certainty of an annuity. All wrapped up in a simple tax-efficient product. In short, everything you need to feel better equipped to prepare your clients for retirement.
What else would you expect from Retirement Advantage?
 What freedom and choice will mean for UK pensioners, Social Market Foundation, 2015
 ABI data, Q3 2015 (https://www.abi.org.uk/News/News-releases/2015/11/Pension-Stats-six-months-on)
 Annuities and retirement satisfaction, Rand Corporation, 2003
 YouGov survey commissioned by Retirement Advantage, 2015