Our report, Can we help consumers avoid running out of money in retirement?, explores what rate of drawdown is likely to be sustainable and compares this against full annuitisation, and then combinations of drawdown and annuitisation. It addresses and answers the following questions:
Consumers are increasingly accessing their DC pension pots, opting for drawdown products rather than annuities, and an increasingly large number of those consumers are purchasing drawdown products without regulated financial advice. As drawdown products do not offer a guarantee, it increases the risk of consumers running out of money in retirement.
The two main factors that help provide a sustainable income are the age at which consumers start drawdown and the rate at which they withdraw their savings.
A consumer who enters drawdown at age 65 has a high likelihood of generating sustainable income if they withdraw 3.5% per annum, or equivalent to £3,500 from a £100,000 pot.
Comparatively, a consumer at age 65 could expect to receive around 4.5-5.5% of their pot per annum from an annuity as the annuity provider can pool risk among its consumers. This would be equivalent to £4,500 or £5,500 per annum.
If an individual starts drawdown at age 55, then the sustainable level of annual income reduces from 3.5 - 3.0%, or equivalent to £3,000 from £3,500.
The investment strategy of a consumer’s pension will affect their income sustainability and the range of outcomes. The difference between a balanced and either a cautious or adventurous investment strategy could be equivalent to 4 years’ worth of income.
A combination of annuities and drawdown enables consumers to balance flexible access vs guaranteed incomes. It can also lead to higher overall income.
When deciding what combination of drawdown and annuitisation would be best, in order to meet their circumstances consumers need to consider a range of questions including:
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