Ms Holt adds: "Where a client doesn’t want to completely lose the flexibility of drawdown, but would feel comfortable with some certainty of income, it may be possible for them to have both.
"For example, using guaranteed income sources to meet essential outgoings means that the flexibility of drawdown is available for the rest of the fund – assuming that your client is willing and able to take on some investment risk."
The role of annuities
Annuities allow retirees to insure against the risks of poor investment returns and outliving their fund, says Simon Gray, managing director at advice company Hub Financial Solutions.
“An annuity has no ongoing fees and no need for a retiree to make investment or withdrawal decisions, which may become more difficult as people’s cognitive function declines with age,” Gray adds.
When it comes to annuities, Ormston at Retirement Line notes how savers are asked to build their own product.
“Like ‘extras’ when someone purchases a car – and of course, each option comes at a cost,” he continues.
“Understandably, the annuity market is price-driven, with the highest figures getting the most engagement.
“However, this approach comes with dangers. The most obvious ones are that unengaged people focus on getting the product up and running and/or people focus on the short term, [concentrating] on the highest income without potentially giving enough thought to the options available such as guarantee periods, value protection, joint life and increasing payments.”
Many retirees will benefit from having a secure income that is sufficient to cover at least their basic needs such as day-to-day living costs and household bills, which Gray labels as a ‘minimum income requirement’ that they cannot afford to lose.
“Once someone’s essential costs are covered for their lifetime, they can then consider how to use any remaining cash to generate cash for non-essentials and luxuries,” he adds.
“By securing a core level of income, they then have more financial and estate-planning opportunities because it gives them the confidence to invest, spend or give away other assets.”
Ormston likewise suggests a combination of the state pension and an annuity to cover essential household bills, after which any excess could be invested in drawdown providing flexibility and investment exposure.
“We are great fans of the [Pensions and Lifetime Savings Association's] Retirement Living Standards and feel many could look to the minimum Retirement Living Standard as a guide to support this approach,” says Ormston.
“For a single person, the current minimum Retirement Living Standard is set at £10,900 a year. For those receiving the full state pension of £9,339, this leaves a gap of £1,561 a year to reach the minimum level.
