The pension freedom introduced in April 2015 saw a surge in retirees moving away from the safety of annuities. Although annuities promise guaranteed retirement income for life, they offer far lower potential rates of return compared to the riskier but flexible option of income drawdown. However, last summer’s market turbulence began to rock the boat for retirees invested in income drawdown. For many, the negative impact of market losses on their portfolios greatly diminishes the appeal of keeping their pension pots invested. After all, one of the biggest risks for income drawdown investors is that if the value of their pension falls, they may not be in a position to replace the loss with new money, therefore leaving them with a depleted retirement income.
A recent report from financial forecaster eValue is evidencing savers as gradually reverting to the safety of annuities, with the influence of volatile markets cited as the key trigger. October 2015 saw annuities peak at 47%, a 14% increase since the introduction of pensions freedom. Analysts predict that the appeal of annuities will continue to rise following the latest bout of market turbulence as more savers prefer to opt for the life-long security of a guaranteed income.
The volatility of world markets could have wiped as much as 8 per cent off the value of a typical drawdown fund since April 2015, according to a Retirement Advantage [i]report. Those relying on income drawdown are best advised to sit tight, ride the storm and if at all possible, find income from alternative sources until markets stabilise. [i] Retirement Advantage is a retirement specialist that creates products that can help individuals live well in retirement, using the money from pensions and/or the value of owned property.
After much speculation that the freedoms signalled the death of annuities, this latest research is demonstrating otherwise. As pension freedom beds in and new statistics are brought to light, it is becoming clear that the desire to eliminate potential risks associated to market slumps eroding savings, is strongest amongst older retirees. Of course, younger investors have more time to overcome stock market shocks, but those who have already retired do not have the same luxury, especially if they have to withdraw income from their pension today.
The instability of the financial markets, combined with the impending government tax raid on buy-to-let income – frequently used to top-up retirement income - has eroded pension pots so significantly that the option of a guaranteed income for life may again become the preferred option for retirees.
From an advice perspective, sharing market intelligence with clients, so they can see how their financial well being in the future is likely to be affected by market factors, is key to keeping them engaged with the financial planning process.
[i] Retirement Advantage is a retirement specialist that creates products that can help individuals live well in retirement, using the money from pensions and/or the value of owned property.