Annuities in retirement planning
Annuities in retirement planning took a potential big hit when The Chancellor announced the most far reaching changes to the UK pensions landscape with the words “no one will have to buy an annuity”. George Osborne’s statement on the 2014 pension reforms caught just about everyone off guard from political opponents, the regulators, advisers and the financial press. It is not often that announcements this big have not been trailed or leaked ahead of announcement.
So, with people now free to choose how they access their retirement savings from April 2015, are annuities set to disappear from retirement planning, or will the changes to pension legislation help create a more innovative range of retirement income options?
Annuities might be down, but they’re not out
With annuities no longer the default option for savers, there’s a common misconception that they’ve now automatically become the “wrong” choice for clients. It’s true that poor annuity rates and a lack of flexibility may have had an impact on their appeal. The annuity providers themselves have to bear a real responsibility that they allowed a ‘guaranteed outcome product’ could become equated to poor value. They fudged over the Open Market Option available to retirees out of self-interest and whilst interest rates were admittedly low they allowed annuities to be linked inextricably with poor value and poor outcomes. However, it is our opinion that annuities can and often should still be part of the solution for many people entering retirement.
The security of a guaranteed income for life can still make annuities an attractive option, even if this comes at the expense of flexible access to their savings. And of course, there’s always a chance that annuity rates could rise in the future. We do accept however that for many people, the ability to keep close control over their pension pot and easy access to their savings represents a far stronger attraction. It’s this greater choice that is likely to bring the biggest benefits for savers at retirement but it will take careful planning for optimum results.
We are all living longer and this will put pressure on savings
Against a backdrop of record low interest rates and everyone living longer, the challenge investors in retirement face is to get the right balance between income requirements and the desire to keep control over retirement assets. According to the ONS in their 2010-2012 Life Tables people who are 65 years old today are looking at a 66% chance that they or their spouse will live past 90 years old. This means that savings now need to stretch further than ever before, while still generating decent returns.
A mixed retirement strategy can help address these challenges
Whilst every retiree will be different it is likely that the old binary “annuity bad, flexible drawdown good” argument will no longer be seen quite so clearly. A combination of an annuity for a guaranteed level of income for life combined with other investments within a flex drawdown arrangement may make much more sense. Indeed, by purchasing a guaranteed income via an annuity it may well be possible to take a more adventurous investment strategy with the remaining invested capital to generate more income for longer.
The permutations are endless and when other tax free investment such as ISAs and are added in it is likely that a detailed retirement strategy will be required.
By constructing a strategy of investing flexibly across a range of different income-producing assets, such as dividend-paying equities, corporate and emerging market bonds, real estate securities and convertibles, multi-asset income funds aim to reduce risks to capital. What’s more, they aim to generate higher, more sustainable income and long-term capital growth. This is incredibly important with the longer life spans I mentioned earlier.
Greater choice comes with greater responsibilities
When it comes to pensions, there’s no doubt that greater choice at retirement represents a huge step forward for the investors but with greater choice also comes with greater responsibility and possibly worries over the balancing of assets with life span. Add in over the period of retirement possible decreasing mental capacity or health, volatility within investment markets and it becomes clear that this is will form an ongoing subject for the rest of a retirees life.
We feel we are well able to help you at this point with your financial planning and investment management requirements around this hugely important subject and would welcome the opportunity to take you through your options. Whether it is assistance with annuities in retirement planning, a suitable long term investment strategy or any other wealth management matter feel free to call us on 0207 337 1390 or contact us via email.
We stand ready to assist.
Lee Robertson, CEO
Lee is a Chartered Wealth Manager and is listed in the definitive Spears Wealth Management Index as one of the UK’s top 10 wealth managers. He is a regular contributor to the financial press and is often on television discussing wealth management and investment issues.
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