The latest inflation figures for the UK have shown that the consumer price index (CPI) now stands at 5.4%, the highest annual reading since records started in 1997.
And with inflation set to increase and eat away at pensions, financial planning firm Continuum believes there is likely to be a growing number of advisers recommending annuities.
According to the Financial Conduct Authority (FCA)’s retirement income data, 40% of pensioners withdraw from their pots at an annual rate of 8%.
Continuum said that by entering drawdown in cash and withdrawing at such a high rate, savers risk running out of money.
In 2020-21, the number of annuities purchased fell by 13%, but the financial planning business said that the current inflation backdrop has the potential to “lead to a strong resurgence in their popularity”.
This is because an annuity will guarantee retirees a regular income for the rest of their lives, “no matter how long they live”, by either converting all or part of their pot, Continuum added.
But, the firm warned that should equities continue to grow at a similar or higher rate to inflation, it could make annuity rates less appealing for those approaching retirement. Additionally, annuity withdrawals and lump sums are taxed as ordinary income, meaning they would become a less tax-efficient way of receiving regular payments in retirement.
Look ahead
Martin Brown, managing partner at Continuum, said this careful balancing act shows how important it is for retirement savers to get professional advice.
“Inflation means complications for most types of financial planning, but particularly for anyone looking at a pension,” he added. “If inflation stays at its current level of just over 5%, a pension income that seems lavish now at retirement can be painfully small 20 years later.
“Those who are ready to start drawing a pension need their adviser to make sure their pension pot works as hard as possible for them. For those clients with a workplace pension or a Sipp, advisers need to look at solutions for inflation in the years to come.
“A client’s pension needs to last the rest of their retirement, which could easily be 20 years long, or more, and be enough to pay for care if they need it. One way to be certain of this is to arrange an annuity, buying a lifetime income from an insurance company.
“At Continuum, we expect to see an increase in the popularity of annuities amongst advisers. Index-linked annuities could prove to be a particularly popular recommendation as advisers look to offer their clients some protection against inflation which looks to be long-lasting.”
