Retirees with a health condition should turn their backs on drawdown and choose annuities, according to Megan Jenkins, partner and financial planner at Saltus.
Jenkins discussed how over the past 12 months, for every single client of hers that is in drawdown and is retired, she has looked at annuities for them.
She said: “Annuity rates fell dramatically and were low for a very long time and that was because interest rates were low and annuity rates were really, really poor.
"What’s now happened over the last couple of years [as a result of the country’s cost-of-living crisis] is that annuity rates started to rise and are now at significant levels.
“We’re now in a period where investment returns have been poor and so they have made people think that it’s all well and good having flexibility and a drawdown pot, but then you’re completely open to investment risk.
"And when you’re in a period like it has been quite sideways in terms of return, then actually, having a guaranteed income, which is not in any way influenced by what markets are doing, is appealing.”
Jenkins discussed how she has one client who has an uncommon 18 per cent annuity because of her underlying health condition, which affects her day-to-day quite significantly.
“What we’ve found is that the underlying health conditions people have, such as high blood pressure or cholesterol, can make a huge difference in annuity rate.
"With the client who has the annuity rate of 18 per cent, there is a protection/guarantee that if something happened to her, the amount that she bought that annuity would go back to her beneficiaries.
“So she gets the flexibility of being able to pass something down. She also has a guaranteed income for life which covers her day-to-day, and that wasn’t even using her whole pension pot, and we were able to cover her monthly shortfall with an annuity. And a couple of years ago, she wouldn’t have gotten that type of rate.”
Blended pension
Jenkins said there was still an argument for people to look at annuities if they are in a balanced risk profile because they can blend, by having guaranteed income but also taking some risk.
“Let's say somebody has a pot of £500,000 and they use £250,000 of it to buy an annuity at 6 per cent.
"So £50,000 a year they could then take as an annuity, and then with the remaining £250,000 they could then afford to take a growth approach and be adventurous because they know that they've got £15,000 a year guaranteed coming to them for the rest of their life. I do think on balance that medium risk is down and it’s worth looking at annuities,” she added.
Jenkins believed annuity rates would remain high, even if interest rates come down.
She said: “Even if interest rates come down, we’re not going to go back to a situation, in the medium term, where the base rate is at zero per cent. So the interest on annuities will still be more attractive than they have been previously, which is great.”
