Peter Quinton, head of annuity planning at Bucks Consultants, says most people buy an annuity at retirement because their employment income has stopped and they need to replace it as soon as possible. However, these days the options are much more attractive, he says. “The key is tax-efficient income and that’s what phased retirement is for,” Mr Quinton says, because it offers better death benefits and flexibility.
There are some benefits for those who choose to keep their pension pot invested and buy annuities with small portions over the years. This process, Mr Quinton says, is a bit like pound-cost averaging and results in the client getting an average annuity price as time goes on.
Tough financial times
Low gilt yields are one thing, but the continued market volatility adds yet another layer of uncertainty onto the retirement puzzle. For clients who can afford to move into income drawdown or use phased retirement in some form, a major worry is the effects market shocks might have on their investment pots.
“Volatile markets are problematic for those who are looking for a stable income during retirement,” says Robert Graves, head of pensions technical services at Rowanmoor Pensions. And while falling gilt yields have a major impact on annuity rates, they have a similar effect on the maximum income that can be taken in drawdown plans.
Mr Graves says it is necessary to build a portfolio designed to weather difficult markets, but adds that the flexibility it provides should not be abused because it will have repercussions in the future. “Consideration must be given to an appropriate investment strategy for the drawdown funds and level of income to draw that will offer a good probability of sustaining a required level of income,” Mr Graves says.
Meanwhile, David Tiller, head of investment proposition and strategy at Standard Life, says investment needs change dramatically once a client moves into drawdown. “One of the challenges that is in the market is that a client who is pulling an income from a portfolio is very different from someone in the accumulation phase,” Mr Tiller says. “When you start taking an income, your sensitivity to market loss increases significantly.”
Once a portfolio is in drawdown, a shorter outlook is needed, Mr Tiller says, although he adds, “People in retirement tend not to be chasing returns, but want some equity growth.” But this cannot be at the expense of securing a retirement income. Mr Black at Standard Life adds, “You need growth, but not at all costs.”
