With annuity rates at their highest levels in decades and the FCA placing greater scrutiny on retirement income advice, guaranteed income solutions are firmly back on advisers’ agendas.
Sean Osborne, Retail Distribution Director at Just Group, explores why advisers are increasingly blending annuities with drawdown strategies, how the retirement market is evolving beyond traditional accumulation models, and why behavioural and longevity risks are becoming central to modern decumulation planning.
Annuities are back in the spotlight. This month it was revealed that the best annuity rate for a 65-year-old had topped 8% for the first time in years. A 65-year-old with a £100,000 pension could buy a guaranteed income for life of more than £8,000 a year, compared to around £4,500 four years ago.
In February, annual figures from the Association of British Insurers highlighted the shift in annuity sales to those with larger pensions who are usually advised. Sales of annuities over £250,000 had risen by 31% and those over £500,000 by 54%.
Clients who might once have dismissed annuities as poor value cannot ignore them. Rates at their highest in two decades have materially altered the level of investment risk clients must take to achieve comparable levels of secure income from drawdown. In practice, the ‘cost’ of retaining flexibility has risen sharply.
But focusing solely on rising rates misses the bigger story.
The real shift is that advisers are increasingly reframing annuities not as a competing strategy to drawdown, but as a risk management tool within a broader retirement income framework.
For years, retirement planning defaulted to a familiar formula: diversified portfolio, sustainable withdrawals and long-term growth. But retirement is not simply an accumulation problem with withdrawals bolted on.
A traditional 60:40 drawdown strategy still leaves clients exposed to sequencing risk, longevity risk and behavioural risk.
A market correction early in retirement can permanently damage sustainability, even where long-term returns eventually recover. Equally, clients can become increasingly risk-averse as they age, particularly when they are relying on portfolios for day-to-day spending.
Advisers are recognising that many retirees do not need all or even most of their pension to remain invested and easily accessible for the rest of their lives, and that there may be a trade-off between income and flexibility.
Blending drawdown with annuities allows advisers to retain flexibility within the broader retirement strategy while introducing an asset designed specifically to provide predictable lifetime income. Annuities complement drawdown by reducing pressure on the invested portfolio to deliver both growth and income simultaneously.
Longevity risk is fundamentally different from market risk because it cannot be diversified away through asset allocation alone. Modelling and stress-testing outcomes are helpful, but they can’t guarantee a client’s pension income will outlast them.
Improvements in healthcare and living standards mean many retirees face several decades in retirement, increasing the risk of either exhausting savings or restricting spending out of fear of running out.
Annuities can play a unique role by allowing advisers to transfer at least part of that longevity risk away from the client, creating greater certainty and income sustainability.
In effect, annuities fundamentally alter the psychology of retirement. It creates spending confidence because clients know more income will arrive regardless of what markets are doing. That can reduce anxiety and help prevent retirees from underspending and unnecessarily lowering their quality of life.
The big shift in retirement advice has been the recognition that much of the industry’s technology and planning infrastructure was built for accumulation rather than decumulation.
Longevity risk, sequencing risk, inflation risk and withdrawal sustainability are central to retirement planning, but it is only recently that software has started making it easier for advisers to model blended retirement strategies and compare different income approaches.
Underpinning this is better fact-finding and more sophisticated underwriting, which allows guaranteed income to be tailored around individual health and lifestyle characteristics in ways that were not possible years ago.
The evolution of the retirement market is creating new ways to meet the challenges. For example, the creation of our Secure Lifetime Income (SLI) solution is likely to be seen as the pioneer in a shift to blended retirement strategies because of the benefits to both advisers and clients in terms of operational simplicity, more integrated planning and greater tax efficiency for clients.
The innovation of SLI is that it gives advisers the chance to create a ‘blended’ solution within an individual’s SIPP wrapper on a single platform. The higher level of income produced by the guaranteed income reduces how hard the other assets in the portfolio must work to provide the required level of income.
As the income is uncorrelated to other portfolio assets, the benefit is available in all market conditions and for as long as the client lives (or for a set period in the case of our Fixed Term Investment solution). Unlike the income from a traditional annuity, which is taxed at source, the SLI and FTI income is paid tax-free into the SIPP bank account, creating a range of reinvestment and tax-planning opportunities.
The FCA’s increasing focus on retirement income advice is pushing advisers to demonstrate more clearly how their recommendations address sustainability, vulnerability and long-term income security.
Advisers are expected to show they have properly considered the full range of retirement income risks facing clients, and that is naturally bringing guaranteed income solutions back into scope, particularly for clients with lower risk tolerance, limited capacity for loss, or concerns about running out of money later in life.
The questions advisers must answer are: what role should guaranteed income play within this client’s overall retirement strategy, and how should that change as they move through retirement?
For some clients, the answer may still be none, while for others it could be the primary solution rather than a supporting one. The important point is that advisers are increasingly revisiting the conversation instead of dismissing it outright.
Retirement planning is about managing risks clients may not fully understand until they are already living through them.
About Sean Osborne
Sean is the Retail Distribution Director at Just Group, responsible for the distribution strategy to support business growth and provide market-leading services, with a focus on the UK retail intermediated market. He has more than twenty years of experience in financial services, and most recently was Group Head of Sales at Charles Stanley, with previous roles including Head of National Accounts at Charles Stanley, Head of Sales at Suffolk Life and senior roles at Legal & General.
