Is it possible to have both guarantees and flexibility? Yes is the answer – either by using investment funds to provide the guarantees and level of protection required, or by using traditional annuity products alongside a drawdown arrangement. The client’s objectives and risk profile will determine the appropriate allocation of funds to each element as shown above.
Case study
Jack is married to Peggy and looking to retire at age 65. Jack is going to sell his business for an expected sum of £100,000 and also has a private pension of £150,000. Peggy is already in receipt of her NHS indexed-linked pension of £16,000 a year and her state pension of just over £6,000 a year.
Their expected outgoings or living expenses are £30,000 a year. So with Jack’s full state pension their total secure income is £28,000 a year. Jack and Peggy are fairly cautious in respect of financial investments. Jack decides to invest half his pension pot, £56,250, in a single life, retail price index-linked lifetime annuity to ensure they can continue to meet their ongoing living expenses throughout retirement. The balance of £56,250 could be invested into a flexi-access drawdown. This element will provide the potential to grow income while helping meet any unforeseen capital requirements – although Jack has some liquid reserves from the sale of his business and his pension tax-free cash.
Annuities
Fixed-term annuities, which are written under drawdown, rather than annuity rules, can be a useful part of a retirement portfolio.
Clients often want a degree of flexibility and do not want to put their capital at risk, so they could opt for a fixed-term annuity. This retirement plan can provide a guaranteed lump sum at the end of a selected term which can be set between one and 40 years. Alternatively, clients can opt for a fixed income. Death benefits can be incorporated and kept within a pension wrapper for a beneficiary.
For cautious clients who want some short-term security while still keeping all options open, fixed term annuities can deliver a good solution.
For example, David is aged 60, with a pension pot of £40,000. Due to poor health he wants to reduce his working days from five to three. David has living expenses to meet for the next five years and a small mortgage of £10,000 which he would like to pay off.
He needs to know he can continue to meet his outgoings until he receives his state pension and his deferred final salary pension.
