A combined approach of phased annuities and drawdown can achieve a higher total income in retirement and give retirees both security and flexibility, according to Standard Life.
According to analysis by Standard Life, for the second year in a row, a phased annuity and drawdown strategy has delivered the highest total income over a 25-year retirement, reaching £259,115 by age 90—more than a level or inflation-linked annuity.
Standard Life says that though this approach does carry more investment risk, it offers a balance of guaranteed income, growth potential, and adaptability.
The analysis looked at three options for a retiree with a £150,000 pension. One was using the entire amount to buy a level annuity at 65. Another was purchasing an inflation-linked annuity. The third was a phased approach, where £90,000 was used for an annuity at 65, followed by £20,000 every five years, while the rest remained invested with a 5 per cent return and a 3 per cent annual withdrawal.
The phased strategy starts with a lower income of £8,155 at 65 but gradually increases to £12,065 by 80 and stays at that level for life. It also benefits from rising annuity rates, which start at 6.6 per cent at 65 and grow to 10 per cent by 80, helping to manage inflation.
Standard Life head of annuities Pete Cowell says: “Retirement itself is changing – people no longer expect to stop work at 65, and instead, there is increasingly a period of adjustment as people begin to work less or change roles before ceasing work entirely. While most of us want the security of knowing that our income will be maintained at a certain amount, the chances are many of us won’t have saved quite enough to ignore the need for further investment growth. The good news is that there is now increasing recognition around how using a combination of different solutions, can often better meet people’s needs.
“Having an element of guaranteed income can be an important part of the retirement mix, and with people living longer, the case has never been stronger. Supported by strong annuity rates, we have seen an increase in annuity sales over the last year, which demonstrates how people are looking for certainty from their retirement income. This is a trend we expect to continue into 2025 and beyond, especially considering the recently announced changes to include pensions in scope for inheritance tax, which make annuities more appealing due to emphasis on drawing an income. We also see an increasing role for fixed term annuities, which can provide even greater flexibility and help plug any income gap between retirement and the State Pension kicking in.”