As both state and private pensions begin to fall short of what many pensioners need due to inflation, we may see a growth in the number of financial advisers recommending annuities, according to national financial planning business Continuum.
December’s 2020/21 FCA retirement income data revealed that over 40% of pension savers are withdrawing from their pension pot at an annual rate of 8% or more. By entering drawdown in cash and withdrawing at such a high rate, many pension savers have the risk of running out of money.
In 2020/21 the number or annuities purchased fell by 13%, but Continuum believes rising inflation has the potential to lead to a strong resurgence in their popularity.
UK inflation (CPI) grew by 5.4% in the 12 months to December, hitting a 30-year high, according to figures release by the Office for National Statistics this morning.
In a time of surging inflation, it is more important than ever for retirees to get portfolio positioning right in order to maintain their lifestyle.
By purchasing an annuity, pension savers entering drawdown can ensure they have a regular income for the rest of their life, no matter how long they live, by converting all or part of their pension pot.
However, should equities continue to grow at a similar or higher rate to inflation, it could make annuity rates appear less popular for many approaching retirement.
It is also important that advisers remember annuity withdrawals and lump sum payments are also taxed as ordinary income, and therefore can be a less tax efficient way of taking income in retirement.
Martin Brown, Managing Partner at Continuum, said this careful balancing act shows how important it is for retirement savers to get professional advice when planning for retirement.
He said: “Inflation means complications for most types of financial planning, but particularly for anyone looking at a pension.
“If inflation stays at its current level of just over 5%, a pension income that seems lavish now at retirement can be painfully small twenty years later.
“Those who are ready to start drawing a pension need their adviser to make sure their pension pot works as hard as possible for them. For those clients with a workplace pension or a SIPP, advisers need to look at solutions for inflation in the years to come.
“A client’s pension needs to last the rest of their retirement, which could easily be 20 years long, or more, and be enough to pay for care if they need it.
“One way to be certain of this is to arrange an annuity, buying a lifetime income from an insurance company.
“At Continuum, we expect to see an increase in the popularity of annuities amongst advisers. Index-linked annuities could prove to be a particularly popular recommendation as advisers look to offer their clients some protection against inflation which looks to be long-lasting.”
Most annuities purchased from life insurance companies are fixed, meaning the client will know exactly how much they are receiving and when. However, with a fixed annuity in periods of inflation the client is faced with a pension that buys them less and less as the years pass by.
Index-linked annuities can see the amount paid to the client increase in line with inflation.
With an index-linked annuity, the client will also receive guaranteed payments until the end of their life, but the amount paid will be linked to the performance of a specific index. This index can be RPI or CPI, the government’s measures of inflation.
Any potential losses due to deflation will usually be protected with a minimum rate of return.
The most prudent step for pension savers to take is to fully review their circumstances through a professional financial adviser.