Annuities the ‘missing asset class’ for sustainable retirement income

Sophie King reports...

Retirees could benefit from more sustainable income and higher death benefits by including guaranteed income in the asset mix of their portfolios at retirement, according to research by Milliman.

In its Annuities reinvented paper, the consulting and actuarial firm addressed the questions of whether including annuities within the ‘asset mix’ could improve the chances of a retirement investment strategy continuing to provide an attractive retirement income over the retiree’s lifetime and, if so, how this might impact any legacy after the retiree’s death.

The report noted: “For those enjoying a long life in retirement, our analysis revealed clear benefits to annuitising part of the retirement pot. The strategy resulted in a higher likelihood of maintaining a target annual income and also, somewhat surprisingly, a higher average death benefit.”

Analysing the case of ‘Robin’ – a 65-year-old looking to take an annual income equivalent to 4% of her retirement pot that moves in line with inflation – the report concluded: “By combining a level annuity with an equity drawdown fund, Robin increased the likelihood of maintaining her target income until age 100 from 45% to 55%, compared to a drawdown fund investing in equity and bonds. Where sustainability of income is a priority, these results are significant. ”

According to Milliman, its modelling indicated the relative merits of the two strategies vary in line with a range of factors, including a client’s age and health status, their preference for a fixed or inflation-linked income, the ongoing fee level on the drawdown funds, and the allocation to the various asset classes.
The firm added, however: “Looking across these variables, we found little in our results that could be used to justify not including annuities within the retirement conversation. Furthermore, the benefits they potentially provide to an income in retirement extend beyond the guarantee of ‘an income for life’ that has traditionally been used to sell annuities.”

‘Groundbreaking’ research

According to Just Group, the research “reinforces the need for financial advisers to highlight the value of ‘guaranteed income for life’ solutions to their clients as a key component of a sustainable retirement income strategy”. It could potentially challenge advisers’ strategies on investing in retirement, the company added.

Just Group group communications director Stephen Lowe said: “This is a ground-breaking report at a time when many thousands of retirees are seeking ways to balance pension flexibility with sustainability.

“It demonstrates combining an annuity, rather than bonds, with equities in a drawdown strategy will increase the likelihood of maintaining the target level of income over the course of retirement.”