Guaranteed Drawdown is the hot topic in retirement solution innovation. Since the pension freedoms in April, there has been a big shift from annuities to drawdown, but the two products couldn’t be more different.
The choices facing retirees today seem overwhelming, it used to be easy, pick an annuity with the highest income offered and retire. The flexibilities and access to full pension savings offered by drawdown have meant a majority shift in take up resulting in drawdown now being the most favored option.
Whereas an annuity offered lifetime security, drawdown doesn’t. The trade-off is the ability to take additional income when needed, but as drawdown is an investment, poor performance could result in funds running out all too soon.
This is where Guaranteed drawdown tries to snuggle in. Described as a halfway house between an annuity and income drawdown it aims to offer a guaranteed lifetime income but with the ability to take additional income if needed.
The main players in the market are MetLife, with similar offerings from AXA and Aegon, who launched a product this year. The main concern with these products is their charges. The guarantee doesn’t come for free and ongoing charges can look expensive. There is an argument that if you want a secure lifetime income but with the ability to take extra income, buy an annuity with some of your funds and put the rest into drawdown.
There has been plenty of market research by the likes of MetLife stating that people want at least some guaranteed income for life but also flexibility (95% stated this in a recent survey), but many are unwilling to pay the additional costs. Their annual costs are around 1.65% for a £250,000 fund.
The dominance of the MetLife could well be coming under attack as providers see an opportunity in this sector. Zurich are planning their own version and more recently Partnership are looking to launch a low-cost version. MetLife have recently relaunched their product with some tweaks to try and stay ahead of the game.
Partnership, the enhanced annuity provider has needed to innovate since the annuity market dropped off a cliff following the March 2014 pension reform budget announcements. They plan to offer a guaranteed annuity income with flexi-access drawdown through a single pension account. The product isn’t due to be launched until Sept but may well challenge the MetLife plan. Partnership have vast experience of underwriting annuities and could therefore offer a more attractive guaranteed income than MetLife, which is based on a percentage of funds.
The extra competition is going to continue to drive costs down and force innovation, which is all great news for retirees. We believe guaranteed drawdown will become more popular as it becomes more known and better priced. The trouble at the moment is that its one of many options for retirees and the choices are overwhelming. The education of retirees is largely done by the Sunday financial papers and guaranteed drawdown isn’t widely discussed.