Retirees are likely to miss out on sustainable income and death benefits if they do not annuitise at least part of their pot, new research finds.
In a paper from actuaries Milliman, which draws on data from provider Just, Milliman modelled a pure drawdown strategy combining equities and bonds, and a combined annuity with an equity-only drawdown fund to see how they would compare for different types of clients in different market conditions.
For a 65-year old, for example, who was looking to take 4 per cent income matched with inflation, Milliman calculates the annuitisation option can increase the liklehood of maintaing annual income for the next 35 years from 45 per cent to 55 per cent.
While the bond-equity strategy did initially have higher average death benefits as part of the pot had not been spend on an annuity, after 21 years of retirement, the combined value of the fund including the annuity becomes larger, therefore a greater proportion is available for beneficiaries.
Milliman says: “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.”
It adds: “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.”
The analysis notes that certain annuity products already have death benefits attached or the option to include them.
Milliman notes that “complex enhancements to a pure drawdown strategy have struggled to gain traction” in recent years.
A number of providers have pulled out of offering guaranteed drawdown or unit-linked guarantee style products in recent years.
Just communications director Stephen Lowe says: “The figures in the report challenge the notion that buying guaranteed income means giving up death benefits…The truth is that in a combined strategy, having guaranteed income helps protect and enhance the equity element which should allow the majority of people to leave more to heirs.”