Advisers with drawdown clients should be assessing in their annual review whether some of their portfolio is used to buy an annuity, especially as clients get older, argues Better Retirement director Billy Burrows.
This week, actuarial experts Milliman, supported by specialist annuity provider Just, published research that framed an annuity as an asset class.
The report suggested that an annuity/equity mix could drive better outcomes in a retirement portfolio than a bond/equity mix.
The calculations showed that this applied particularly for longer-lived clients, not only in maintaining a target annual income but potentially providing a higher average death benefit.
100% guarantee
Burrows said: “The argument is dead simple. If you are running a portfolio of 60% equities and 40% bonds, then you could think of using some of the bonds to buy an annuity.
“First of all, the underlying yield should be higher as they invest in all sorts of different things. You also have the mortality cross-subsidy and there is no default risk. If you buy your own bonds you could lose your shirt, but if you are in an annuity it is 100% guaranteed.
“The research confirms my view that for most people in drawdown, as they get older, it is to their advantage to buy into annuities. It is all part of the de-risking process.
“That is down to the quality of the advice. Good advisers will be thinking about this and, as part of an annual drawdown review, should be looking at when is the time to buy annuities.”
He added that it may even become customer-driven over time as the risks of drawdown become clearer.
