As most of the income is provided by the annuity, the impact of sequencing risk is modest and the fund should grow more rapidly over the long term than a traditional (60/40) equity/bond portfolio.
There is another issue to consider. Bonds are traditionally considered to be negatively correlated with equities, but this inverse relationship has recently been questioned. There have been several occasions when both equities and bonds have fallen in value at the same time, including the most recent market falls.
Not only is the income from an annuity guaranteed not to fall, it is payable for life.
It’s very easy to focus on the hard numbers, but there is a valuable emotional benefit from buying an annuity: peace of mind. Many people would prefer to focus on enjoying their retirement, rather than worry about their investments.
A 2018 study found that people who have annuitised are less likely to suffer from depression or feel sad compared with those who choose drawdown.
The assurance that comes from knowing there is a regular guaranteed monthly income, payable for life and immune from the vagaries of investment markets, lies at the very heart of Maslow’s hierarchy of needs. The primal urge to feel safe and secure, to have enough food, drink, shelter, clothing, and warmth.
Advisers should not ask themselves whether an annuity might play a part in a retirement portfolio. They should ask the question: why would a solution that provides a guaranteed income for life not lie at the heart of my clients’ retirement strategies?
Stephen Lowe is a director at Hub Group
