Can your retirement income be both secure and flexible?
Since pension freedoms were introduced last April, retirees have had more flexibility and choice when it comes to taking their retirement income. They are no longer obliged to buy an inflexible annuity.
However, with choice comes responsibility and with a higher state pension age, longer life expectancy and rising inflation, there’s more pressure on people to make the right decision when it comes to their pension savings.
An annuity will still be the right option for some retirees. It provides the security of a guaranteed income for life. However, rock bottom annuity rates are turning people’s attention to drawdown, where you keep your pension fund invested in the stock market, and take an income and access cash whenever you need it.
Both options have their benefits and risks leaving a gap in the middle for those who want guaranteed income as well as flexibility and the upside that staying invested in the market can bring.
New guaranteed drawdown products aim to fill this void. Aegon, Metlife and Axa are the main players in this space, but more entrants are expected as the market matures.
Here, a provider and financial adviser explain the pros and cons of these products:
Barry Cudmore, managing director of product provider Aegon
Innovation in the retirement income market means it doesn’t have to be a choice between an annuity or drawdown. We know that people want a mixture of both: access to cash if they need it, but with the security of a guaranteed income for the rest of their life.
The new pension freedoms have made this combination possible for retirees, with a handful of pension providers launching new products which blend flexibility and security.
Guaranteed drawdown products keep funds invested providing exposure to potential market upside, guarantee income throughout retirement, access to cash if needed, all with the valuable addition of death benefits for those keen to pass money to their loved ones.
The expertise used to develop the product doesn’t come free, but the utility it provides, insuring against running out of money, is unquestionable. We are happy to insure ourselves in other walks of life, such as with our homes or cars, so why not in later life?
Guaranteed drawdown is most suited to people who want the best of both worlds in retirement. The ability to maintain a certain standard of living in retirement with the flexibility to access cash in case of an emergency. In this time of economic and political uncertainty, it is more important than ever that those in retirement protect their hard earned life savings, and make it work for them.
Angela Murfitt, a chartered financial planner at Fairstone
For peace of mind, the most sensible first step [for retirees] is to secure the “core” amount of essential income needed and as annuity rates are so poor currently, a credible alternative is to consider a drawdown with a secure income and or secure capital option to underpin this.
The benefit with this approach is that guarantees are paid for on a “pay as you go” basis and therefore unlike an annuity where a lump sum is exchanged for a contractual income which is decided at outset, incomes can be amended as you go along and access to capital is maintained – almost the best of both worlds.
Most guaranteed type funds often have mechanisms that lock in any fund growth so you can still benefit from market upturns as well as offering potential increases to the secure income levels paid out.
Clearly this is a developing market and the product offerings are complex therefore often difficult to understand. The costs involved with providing the guarantees is also high and so are a significant consideration when using this approach.
As enthusiasm for this type of product gathers momentum, innovation in the market will continue and no doubt we will see more providers emerging with different product ideas and no doubt a reduction in the costs.