Annuities are not dead they're just sleeping
From the blog: Surveys indicate a significant majority of defined contribution members want steady income in retirement, but just never call it an annuity. So how will they achieve that?
Drawdown is the obvious solution, at least for a while, but there comes a point when the risk of outliving your money becomes too high and the insurance aspect of an annuity becomes very valuable.
My colleague Rebecca Kemp undertook analysis into this for her masters dissertation at Imperial College Business School.
Her modelling demonstrated that income drawdown was more financially beneficial than annuitising at age 65.
She showed that members should use income drawdown in the early years and then annuitise between age 75 to 82, depending primarily on their risk tolerance. Those who are risk averse should annuitise at the younger end of this range.
What DC members want in retirement…
Source: Aon research with Cass Business School in 2014
The difficulty that I see (and Rebecca noted) was: how do you get members to make a decision over how long to stay in income drawdown? As an industry, we need to provide:
DC design: Six graphs on employers' direction of travel
From the blog: It’s time to turn words into action. While schemes have been extolling the feted ‘better member outcomes’, little movement is taking place to turn hopes and dreams into components of success.
Read the full post here.
- products that invest to and straight through retirement into the income drawdown phase;
- an appropriate default that will switch income drawdown to an annuity. We put a default retirement age in during the accumulation phase, so why not a default annuitisation age in the decumulation phase too?;
- clear communication on risks;
- clear communication on expected annuity values as market conditions change during the drawdown phase;
- clear communication on the impact on their eventual annuity should members take funds above or below the steady income in the drawdown phase;
- consideration of whether to buy the annuity at one point or phase purchase over a period.
We are seeing significant product development happening around the industry, so we all need to keep the options offered at retirement to DC members under careful review.
Anne Swift is principal consultant at Aon Hewitt