But advisers should not discount the advantages of a combination of annuities and drawdown. It may not be as simple as having some money in annuities and some in drawdown to hedge the bets, because the combination should reflect client circumstances and the financial outlook. So the combination can be fine-tuned. There is still a strong case for fixed income plans for those who want guaranteed income and flexibility at the same time. Fixed term income is also helpful if there is a need to bridge an income gap, for example until the state pension kicks in.
During retirement
As every adviser knows, drawdown is an investment solution that needs regular reviews. Once-a-year reviews are common, but it makes sense to keep a watching brief to identify early signs of pending trouble. If advisers think there may be trouble ahead with Brexit they should take this into account when recommending investment strategies for drawdown. For instance, the potential market volatility resulting from Brexit will bring the issue of sequence of returns into focus.
Annuities start to come into their own at older ages and there is a strong case for locking into annuities when the benefit from mortality cross subsidy becomes significant. There is no age for this, but if there is an optimum time to purchase annuities it is closer to 70 than 60.
The chart shows the relationship between annuities, gilt yields and the FTSE and shows the importance of keeping an eye on annuities and investment returns.
The more sophisticated adviser will be looking to identify times when the pension fund has grown and annuities look attractive. This shows the value of a thorough review process.
Later retirement
In later retirement, the investment strategy should err on the side of caution with less risk being taken and, as previously mentioned, the case for annuities becomes much stronger.
Equity release is a product solution that may be considered in later life if additional income is needed. This solution should be viewed like the Bank of England; as a lender of last resort.
Retirement as a journey, not an event, is more than a convenient sound bite. It reflects the true nature of retirement and good advisers will adapt their advice processes to reflect the new dynamics of retirement, which lends itself to a multi-solution approach.
Billy Burrows is a director of Better Retirement Group
Key points
In the countdown to retirement, the emphasis is on the investment strategy.
At retirement, many clients favour the flexibility of drawdown over the guarantee of an annuity.
Annuities start to come into their own at older ages.
