Is there a role for an annuity allocation?
Yes absolutely. Whilst annuities are not an asset class, and are not equivalent to bonds, they should absolutely form part of a broader retirement plan, now that interest rates have recovered.
Retirement portfolios should include allocations to liquidity (for near-term withdrawals), to stability (for down-side protection), and to growth (for inflation protection). A further allocation to annuities (for longevity risk) makes sense as time goes on.
Deciding between drawdown and annuities is not an either or decision. We think there is a strong rationale for those wanting an income to start with drawdown and then build up a series of annuity income streams for a portion of their retirement income. But it may make sense to wait. By waiting to say 75 or even later, there is more time for the drawdown portfolio to grow, assets remain inheritable in the event of early death, and annuity rates are better in older age.
The allocation between drawdown and annuity in later life is not just a function of interest rates and age, but is primarily based on capacity for loss, risk preferences and decision-making capability.
So are annuities an asset class? No – not in the technical sense. Do they merit an allocation within a retirement income solution? Absolutely. The challenge to work out is how much to annuitise, and when. That’s why the value of financial advice in retirement is even more important.
Annuities are not a new asset class: they have been part of pragmatic retirement planning since their invention. The recovery in gilt yields does however mean they are rightly getting renewed attention and they should absolutely form part of a retirement plan. And remember, it pays to delay.
Henry Cobbe is head of research at Elston Consulting
