Skandia’s latest Adviser Insight Survey, of almost 700 financial advisers, reveals that more than two-thirds (69%) believe that the annuity system is failing consumers. An overwhelming majority (89%) also agree that income drawdown is increasing in importance as an alternative.
This growth in importance of income drawdown as a method of taking an income from pension savings is largely attributed to the introduction of flexible drawdown in 2011. 81% of advisers questioned for the Insight Survey felt that this development has made income drawdown an even more attractive option.
Annuities, which provide a fixed level of income for the remainder of life, are the traditional way of creating an income from pensions savings. Currently around 400,000 people entering retirement each year select this approach, with far fewer selecting income drawdown. However this new research suggests this is about to change.
Increasing life expectancy and low gilt yields mean annuity rates remain at low levels so it is vital that consumers review all the alternatives available to them. Income drawdown enables people to take an income from their pension savings whilst remaining invested in the market. Financial advice is essential to ensure the level of income taken and the investments selected for the portfolio are sustainable over the long term.
The need for advice is highlighted in a separate survey by Skandia into consumer confidence** which shows that 60% of the public questioned either don’t know or are not confident that their current savings will sustain their desired living standard in retirement.
The uncertainty is created by the three risks that need to be taken into account when considering retirement income; sustainability, longevity and inflation.
Adrian Walker, pensions expert at investment business Skandia, comments: “How today’s workforce is transitioning into retirement is changing. People are living longer and therefore ensuring the method selected for securing a retirement income is sustainable and takes account of inflation is absolutely crucial.
“It is not all about annuities anymore. Longer life expectancy has been consistently eroding annuity rates over the years and when you take the impact of inflation into account an annuity income can look meagre for many people. Income drawdown can provide a more flexible option for the new retirement marketplace but advice is important to ensure it is sustainable and fully understood by the investor.”
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