Home Business NewsBusiness How savers can mix-and-match annuities and drawdown in retirement

How savers can mix-and-match annuities and drawdown in retirement

by LLB Reporter
31st Oct 22 10:33 am

Surging gilt yields might be disastrous for borrowers but they are also dramatically boosting the annuity incomes retirees can secure from insurance companies.

AJ Bell analysis looks at a 65-year-old with a £200,000 pension pot opting for a 50/50 split between annuity and drawdown:
A £100,000 drawdown pot could provide an inflation-linked income worth £4,918 per year.

Drawdown also offers flexibility to adjust withdrawals should circumstances demand, potential to benefit from long-term investment growth and ability to pass on unused funds to loved ones tax-efficiently when you die.

The remaining £100,000 could buy an inflation-linked annuity worth between £5,198 and £5,970 per year. The level of guaranteed income depends partly on which add-ons are chosen.

Annuities offer security of income and do not require engagement, but you forgo flexibility. While annuities and drawdown are sometimes viewed as an either/or choice, it can make sense to combine the two to create a retirement income plan that suits your needs.

For example, an annuity and state pension (currently available from age 66) could be used to cover fixed costs, with the rest of your fund benefiting from the flexibility and growth potential of drawdown.

Tom Selby, head of retirement policy at AJ Bell, comments: “Annuities have been in the doldrums for over a decade, in part because gilt yields – which largely determine the rates offered by insurers – have remained persistently low. The flexibility available for drawdown investors has also proven hugely popular since the pension freedoms were introduced in 2015.

“However, rising gilt yields this year have dramatically boosted annuity rates, with reports of rates improving by 40-50% since the start of 2022. This means annuities are now likely to come on the radar for millions of retirees who previously might have dismissed them as poor value.

“It’s important when considering the merits of annuities and drawdown to appreciate that they have very different strengths and weaknesses.

“This is not a binary choice, however, and it can make sense to combine an annuity, perhaps to cover your fixed costs, with the flexibility and growth potential of drawdown in retirement.”

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