Take a combined approach to retirement income

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Since pension freedoms were introduced in 2015, clients have been able to enjoy a greater choice in how their retirement income is generated. These days, more people are able to choose retirement income options that best suit their circumstances - but of course, in the face of the seemingly relentless increase in the cost of living, getting the best value for money from their pension savings is becoming increasingly important for retirees.

And with more than half a million people now living into their 90’s ¹, many people may find they need an income for longer than expected.

With this in mind, clients invested in income drawdown may worry that market volatility could reduce the value of their pension pot to such an extent that it fails to adequately meet all of their needs - and some might be concerned that their pension savings will run out completely in later life.

So, you could find that as clients grow older and move through retirement, their appetite for investment risk dwindles – but they’re still compelled to look for ways to increase their income regularly to meet the ongoing cost of living challenges that we’ve all become familiar with.

Introduce a little more certainty into retirement

Being able to offer an alternative strategy to income drawdown alone, one that will secure a retirement income that will last, and which provides competitive returns, could be an attractive option for many of your clients at, and in, retirement.

Therefore, it could be reassuring to offer your clients the option of a guaranteed income for life through an annuity. High interest rates have led to a substantial increase in annuity rates in recent years, and we’ve seen a resurgence in the popularity of annuity products among consumers. Sales have increased by 38% in the last two years ² as more people recognise the valuable role annuities can play in providing financial certainty in retirement.

The best of both worlds

Taking a combined approach to retirement income by blending drawdown and annuities could help clients to strike the right balance of certainty and flexibility that they may be looking for in retirement.

By using a portion of a client’s pension pot to safeguard a regular income for the rest of their lives, you could ease their worries about meeting their essential outgoings throughout their retirement – and of running out of income in old age. And if clients know the essentials are taken care of, they may feel more comfortable leaving the rest of their pension savings invested in income drawdown for longer to help pay for luxuries.

The flexibility to maximise income

While an annuity purchase has traditionally been thought of as a one-off decision, this outlook has changed in recent years. If a client is looking to maximise pension growth at the start of their retirement, but reduce their investment risk as they grow older, they may find it beneficial to withdraw their pension savings from drawdown in stages, and purchase annuities at regular intervals throughout retirement.

This phased annuity and drawdown strategy means that clients’ pension savings remain invested for longer, allowing them to benefit from more flexibility and growth over time – and then as they get older, investment risk is reduced.

And because annuity rates usually improve with age, choosing to purchase an annuity every five years could provide an additional boost to the overall retirement income received throughout retirement, and is another way for clients to keep pace with the cost of living.

In fact, our analysis shows³ that, for a second year running, a combined phased annuity and drawdown strategy provides the highest overall income throughout a 25-year retirement. Our analysis examined the financial outcomes for a saver with a starting pension of £150,000, comparing three different scenarios.

The first scenario saw the purchase of a level annuity with the entire pension at age 65, resulting with the customer receiving a total guaranteed retirement income of £253,775 by age 90. The second saw the purchase of an inflation-linked annuity with the entire pension at age 65, providing a total guaranteed income of £255,706 by age 90.

While the third scenario saw the combined approach applied through the purchase of a level annuity in four phases - £90,000 at age 65, and £20,000 every five years, with the balance invested in drawdown – with the customer receiving a total income of £259,115 by age 90.

By annuitising in phases, you can balance a client’s need for both flexible investment options that help mitigate the impact of inflation, and income certainty throughout retirement.

The nature of this approach can also provide you with an opportunity to maintain your relationships with clients and their families as you help them to consider their retirement income needs in the future.

Find out how our suite of retirement options can support your clients in later life.

Sources: 1. Estimates of the very old, including centenarians, England and Wales: 2002-2023 Office for National Statistics. 2. Financial Conduct Authority: Retirement income market data 2023/24. 3. Internal analysis conducted by Standard Life in February 2023.