Annuities as part of a blended retirement income strategy

In a retirement landscape where the binary choice between drawdown and annuities is increasingly outdated, advisers are turning to blended strategies that combine the best of both worlds: guaranteed income and investment flexibility.

The role of a blended approach

A blended retirement strategy typically involves allocating a portion of a client’s pension pot to an annuity, to secure a guaranteed lifelong income for necessities. The remainder stays invested in a drawdown arrangement, offering flexibility and the potential for growth.

This approach covers several important concerns for clients:

• Longevity risk: Annuities provide peace of mind, guaranteeing an income for life or fixed period
• Market volatility: Offers stability for clients concerned about the idea of drawdown portfolios fluctuating
• Behavioural comfort: Clients with a guaranteed income floor are more likely to tolerate investment risk in their drawdown pot

The rationale for advisers

In terms of planning and compliance, blended strategies align well with the FCA’s Consumer Duty requirements. A blended approach helps mitigate foreseeable harm by making sure clients have a secure income base, while still allowing for discretionary spending and legacy planning.

Advisers can split retirement incomes into three pots:

1. Essential spending, covered by annuities
2. Lifestyle spending, funded by drawdown
3. Discretionary spending, supported by remaining assets or equity release

A tailored, resilient solution

With annuity rates at near-decade highs, advisers face a timely opportunity to revisit the role of annuities in retirement planning.

Whether fixed-term to bridge to State Pension age, or a lifetime solution to cover core expenses, annuities and a blended approach flexibility and client focus to advisers, and resilience and confidence to retirees.