“This week’s spike in stock market volatility will have given the 76% of people choosing income drawdown over annuities some nervous moments, and will have been a reminder that investments in a drawdown can go down as well as up. Meanwhile, annuity rates have risen significantly in the past year, partly driven by the Bank of England’s first base rise in a decade. Although, while standard annuity rates are recovering, enhanced annuity rates for those with lower life expectancy have fallen by between 5 and 10% - possibly reflecting a lack of real competition in the market. With base rates set to keep rising gradually, will customers be enticed back to annuities’ offer of secure income for life? Holders of drawdown products should not be alarmed by short term volatility of their funds, but this is a reminder that there is no guarantee as to the fund return at any particular point in time.
“Annuities still have a role to play, but providers may need a rethink to make a comeback. Annuities’ guaranteed income stream offers protection against volatility and outliving your retirement pot, and can protect against inflation. But that protection is costly when it is taken out early in a retirement that can last decades, and when customers can manage both volatility and inflation with careful asset allocation. To resonate with today’s retirees, annuities perhaps need to get back to what they were designed to do: provide a reliable income for the last few years of life, when the benefits of sharing longevity risk can be significant. For that to happen, providers may need to offer a wider range of deferred and later life annuities, and advisors and guidance solutions will need to work to explain to customers how secure income can support a drawdown solution.”
|
