As the pension freedoms were introduced back in April, sales of annuities took a huge hit.
Flexible income drawdown – allowing retirees to keep their pension fund invested (for potential growth), drawing from it a flexible income as they see fit – had its restrictions lifted, and was hailed as the saviour of pension income. People were finally allowed to access their pension funds and spend them how they wanted to.
As the Chancellor, George Osborne exclaimed in his April 2014 budget speech: “People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances.
“And that’s precisely what we will now do. Trust the people.”
There would be no more retirees being ‘forced’ into purchasing an annuity product: handing all of their pension savings over for the promise of a guaranteed income for life.
In fact, annuities first saw a hit immediately following Osborne’s reform announcement; sales fell as people held off on an annuity purchase, deferring their retirement in order to take advantage of the new rules. This even had a noticeable impact on the rates being offered, with them hitting an unfortunate record low back in April 2015.
But now, six months after the pension freedoms were introduced retirees, advisors and pension providers are figuring out just what place annuities hold in the new pensions landscape.
Pension provider Retirement Advantage has recently announced it will release a new product that combines elements of both an annuity and a flexible drawdown product.
While a launch date is yet to be announced, the product is currently in the consumer testing and pricing stages.
Retirement Advantage’s pensions technical manager, Andrew Tully explains: “customers are looking for flexibility, the ability to pass money down to their families, but also some level of guaranteed income. What we tried to do was build one contract that contains all those things.”
“The product is written under drawdown but in the drawdown sits an annuity. People can decide how much money they put into each and vary it over time.
“There is nothing else like this on the market”
A somewhat similar product – Aegon’s ‘Secure Retirement Income’ – was also launched back in July. Labelled as a ‘third way’ to manage your retirement income, rather than combining an actual annuity with a flexi-drawdown product, the process keeps a pension invested, but Aegon provides a guaranteed minimum income.
Duncan Jarrett, Aegon’s managing director for retail said that there was “a clear gap in the market for services that provide the income certainty of an annuity with the flexibility of drawdown”.
The risks around drawdown are much higher than with an annuity. While it allows access to money to use as a client desires – even allowing the passing down of money to dependents – it doesn’t offer the security that an annuity does.
As Tom McPhail, head of pensions research at Hargreaves Lansdown told FTAdviser recently: “It is logical to blend your income using drawdown and an annuity to balance off the advantages and drawbacks of both”
The risk of running out of money later in life is a very real possibility using a drawdown product, particularly should finances not be managed successfully.
By combining the two products, either with a process such as Retirement Advantage’s soon to launch product, or by working with a client to find the best combination of products available to them, advisers can assist retirees in making the most of their pension savings with both flexibility and security.