Combining guaranteed income with flexible drawdown income in a saver’s retirement plan may be the best option.
Some things are great on their own, but many are better when combined.
Recent FCA Retirement Income market data covering the year from April 2021 to March 2022, showed an uptick in lifetime guaranteed income (annuity) purchases by 13% to around 68,500 purchases.
We expect this to rise as interest rates increase and costs look more favourable. However, we also expect more and more people to consider at least some purchase of guaranteed income in their overall retirement plan. Why do we think this?
It makes a lot of sense to mix for many
Putting guaranteed and flexible non-guaranteed (drawdown) income together, can give you the best of both worlds in retirement!
There are lots of great things about lifetime guaranteed income on its own
- It keeps paying you an income, no matter how long you live
- It is not affected by how markets change. It just keeps paying you that same income
- You don’t have to think about it again. You buy it and it just gets paid each month
Equally, there are many great things about non-guaranteed flexible income
- It is completely flexible. You can take it however you wish
- It is linked to your pension’s investments, so if they do well, you may be able to take more money (although of course, they may also do poorly, that’s the risk!)
- You can pass on whatever you don’t end up taking over your own lifetime, subject to tax rules
Both have their drawbacks. Drawdown income involves more risk and is a lot harder to manage, whilst guaranteed income is, by design, not intended to be flexible.
Relying solely on one, or the other, may not be ideal for most people. However, combining both can give the best of both worlds for many people. So how do you mix them together?
New product developments
It has always been possible to use some of your pot to buy an annuity elsewhere, which then pays a guaranteed lifetime income directly to you. However, there are now some newer types of products where the guaranteed income can be paid straight into your pot.
This means you can take it as income if needed at the time or just leave it invested in your pot until it’s required. We see these product developments as being beneficial to people looking for a combination of the safety of guaranteed income whilst retaining the flexibility of drawdown.
After polling 200 of our own users, we found that 48% wanted to add some guaranteed income to their overall plan. When asked how much of their pension pot should be used to do so, our respondents’ most popular choice was using 20% to 35% of their pot for a purchase.
To test this demand further, we’ve updated our planning tools to allow our users to see the effect of using 25% of their pot to buy some guaranteed income within their plan. This seems a popular choice and appears to confirm further that demand for a mixture is there, based on current market rates.
Current guaranteed income rates look attractive
There have been a lot of stories in the news recently discussing the rising cost of Government borrowing (and, unfortunately, other borrowing, such as all of our mortgages).
When the cost of Government borrowing goes up, the price of buying some guaranteed income comes down, which is at least some good news for those in, or close to, retirement.
Rates at which you can buy guaranteed income are far cheaper than they have been for many (10+) years. It’s one silver lining in the current financial issues for retirees, which means a mix of both within any retirement plan may be even more attractive.
There may also be another way to buy some guaranteed income
A State Pension is another example of a guaranteed lifetime income and getting as close to a full State Pension as possible is very important. How do you do this?
First, find out how many years of National Insurance credits you have. Then consider how many more you may gain before your State Pension Age. If the total of these is expected to be below 35 years (the amount you need for a full State Pension) you may be able to purchase more years when these are missing.
As recently pointed out by moneysavingexpert.com, this may be time sensitive – which stated: “Until April 2023 you can buy national insurance years back to 2006. After that, you can only go back six years. So if you have national insurance gaps for the years from 2006 to 2017, you need to decide soon whether you are going to buy them or you will lose the opportunity to do so.”
Kevin Hollister, Founder of Guiide, stated: “Retirement is no longer just about pensions. Our continued goal is to use tech to simplify the mystifying subject which is retirement planning and later life products. We believe a ‘put it all together and do it for me’ approach is the optimal route for the non-advised mass market to get the best retirement outcome.”