04 August 2020

Managing retirement income in uncertain markets

The last four months have ushered in a significant period of change, as well as uncertainty. Markets have fluctuated, more than a quarter of the UK workers are currently furloughed, the newspapers carry stories of retirements being delayed and house prices dropped at the fastest rate in May 2020 since the financial crisis in February 2009. Only time will tell what the lasting impacts of this pandemic may be.

This high volatility can have a devastating impact on your clients who are depending on a regular income from their retirement fund. The client’s ability to bear loss plays an important role in considering their exposure to the markets and how to safeguard their minimum income requirements. For clients approaching retirement or drawing an income in retirement these may be especially difficult times. They may be reluctant to invest in equities or perhaps they’ve experienced significant losses.

We understand investors’ concerns amid the current environment, but whilst worrying, it is necessary to stress the importance of having a longer time horizon and avoid falling into the trap of trying to time the market. What’s more, behavioural economics tell us that most people fear loss more than they value gain. What solutions exist for those clients who are either approaching or already in retirement and wish to guarantee at least a part or all of their retirement income? What can clients do in these uncertain times?

Security and peace of mind

For some clients and especially in the current climate, knowing that they have their essential spending needs met can be reassuring. Guaranteed income can be layered with other assets and solutions to build robust and flexible retirement plans. Lifetime annuities can work alongside shorter-term guaranteed solutions, this allows for future flexibility, whilst the client has the certainty and peace of mind of a secure income.

Fixed term annuities can offer this solution, they can provide a guaranteed regular income or clients can choose not to take a regular income and have a guaranteed maturity value at the end of the term. This offers safety from market volatility and a known outcome at the end of the selected term. Benefits can be guaranteed on death and additional features can be added to the product to ensure that dependants/beneficiaries benefit from the income and/or the underlying fund.

A useful ‘bridge’ until the outlook is clearer

Yet fixed term annuities aren’t just a shelter in uncertain times. They can support clients in many ways. Early retirement, reducing working hours, deferring the state pension and much more. Clients will receive a guaranteed income, without any of the risks associated with market performance and they will be able to keep their future options open.

Consider someone retiring gradually - perhaps taking a less well-paid job or working fewer hours. They may have to top up their income during this period. A fixed term annuity can provide the certainty of a guaranteed short-term income to make up any shortfall.

Let’s assume the long-term plan is to buy a lifetime annuity and use this as an underpin. Using a fixed term annuity in the interim means the client will be older, their health may have deteriorated, and they may benefit from an enhanced annuity rate. Of course, if circumstances in the future aren’t favourable, or the client simply changes their mind, fixed term annuities are written under flexi-access drawdown rules, so your client may benefit from having the option to reassess their options at the end of the initial term.

A flexible approach to retirement planning

And it isn't a binary decision. Retirement plans should be frequently reviewed and all assets should be considered in meeting your clients’ objectives. A fixed term annuity can be used in conjunction with other solutions to add stability, security and flexibility to a retirement plan. Underpinning a portfolio with guaranteed income may also provide the adviser and client more freedom to take more risk with the rest of the portfolio. 

In uncertain times, generating a guaranteed income for a fixed term, without making a permanent commitment, can provide valuable peace of mind for your clients. 

Find out more about our fixed term annuity products

Fixed term annuities do not pay an income for life.