Retirees now have a number of new income options. Whilst an underwritten annuity might be the benchmark for a guaranteed return, some may decide to invest monies outside of a pension to generate an income. However, anything over 25% is liable to tax on leaving the pension fund, and may be taxable again depending on the investment vehicle that is used subsequently.
Since the money is already ''invested'' in the pension fund, it may still come down to choosing between a secured or unsecured pension. An annuity promises to pay a set amount of income for life, which might be higher than expected, depending on the client''s lifestyle or medical condition. An unsecured pension may offer flexibility and the potential for growth but there is the risk that the fund and income could fall below the client''s need. This could be a major deciding factor in whether to opt for risk-free solution.
CRITICAL YIELDS
Modelling for a sustainable unsecured pension already exists. Critical yield type A is used to establish the growth rate needed in drawdown to match the annuity that could have been bought at outset.
The textbook wording is:
Type A: the growth rate needed on the "drawdown" investment sufficient to provide and maintain an income equal to that obtainable under an equivalent immediate annuity.
However, a type A illustration is not always based on the best annuity rate in the market, so does not necessarily give the full picture. In some cases it is not even based on the best standard rate available - and is unlikely to consider health conditions.
The best annuity rate should include any uplift due to underwriting. This can be a very significant sum and to understand the real rate of return required from a drawdown fund, an enhanced annuity quote should always be considered for someone with health or lifestyle issues. In some calculators, which allow you to specify the rate for comparison, this may have to be done as a "Type B" calculation.
The textbook wording for this is:
Type B: the growth rate necessary to provide and maintain a selected level of income.
THE FUTURE
Some of this modelling may change in the future but current critical yields still generally default to assume an annuity is bought at 75, though that requirement was already lifted.
If a client is considering drawing directly from the fund, this ''personalised'' critical yield should be discussed along with the level of risk required to match that income. That way, the client can decide whether they would be in a better position by simply securing the guaranteed income at outset.
Since the money is already ''invested'' in the pension fund, it may still come down to choosing between a secured or unsecured pension. An annuity promises to pay a set amount of income for life, which might be higher than expected, depending on the client''s lifestyle or medical condition. An unsecured pension may offer flexibility and the potential for growth but there is the risk that the fund and income could fall below the client''s need. This could be a major deciding factor in whether to opt for risk-free solution.
CRITICAL YIELDS
Modelling for a sustainable unsecured pension already exists. Critical yield type A is used to establish the growth rate needed in drawdown to match the annuity that could have been bought at outset.
The textbook wording is:
Type A: the growth rate needed on the "drawdown" investment sufficient to provide and maintain an income equal to that obtainable under an equivalent immediate annuity.
However, a type A illustration is not always based on the best annuity rate in the market, so does not necessarily give the full picture. In some cases it is not even based on the best standard rate available - and is unlikely to consider health conditions.
The best annuity rate should include any uplift due to underwriting. This can be a very significant sum and to understand the real rate of return required from a drawdown fund, an enhanced annuity quote should always be considered for someone with health or lifestyle issues. In some calculators, which allow you to specify the rate for comparison, this may have to be done as a "Type B" calculation.
The textbook wording for this is:
Type B: the growth rate necessary to provide and maintain a selected level of income.
THE FUTURE
Some of this modelling may change in the future but current critical yields still generally default to assume an annuity is bought at 75, though that requirement was already lifted.
If a client is considering drawing directly from the fund, this ''personalised'' critical yield should be discussed along with the level of risk required to match that income. That way, the client can decide whether they would be in a better position by simply securing the guaranteed income at outset.
