An annuity is not designed to cope with these changes, especially as the timing is not easy to predict, but drawdown is ideal. The rate of income withdrawal can be easily re-set whenever income needs change.
This flexibility also makes it possible for an individual to manage their income tax. Using drawdown it is possible to manage the exact amount of income taken each year and ensure they remain within a particular tax band. Any client who is concerned about their income tax bill should seriously consider using drawdown when they come to retire.
Health issues
Healthy Life Expectancy (HLE) is not increasing as fast as life expectancy, meaning that more retirees will face physical or mental health issues in the later part of their lives. At this point the flexibility of income drawdown allows the client to take a number of different courses. In the event that their mental capacity is declining it may be worth securing their income through an annuity so that no ongoing decisions are required.
If the issue is physical it would be worth taking advantage of the enhanced or underwritten annuity rates that are available. Alternatively if life expectancy is extremely short the individual could decide to take their remaining fund as a lump sum withdrawal, or they could remain in the drawdown plan in order to pass on their fund to family or friends (4).
Continuing investment opportunity
By choosing drawdown a client is electing to remain in the investment market, which could be seen as a negative or a positive depending on the client’s attitude to investment risk.
On the positive side retaining an exposure to stocks and shares increases the chances of further growth in the fund value. This in turn will increase the amount of income that may be taken either immediately or at some point in the future. Clients who find the annuity that is on offer when they first retire is insufficient to provide the income level they would like to have should consider further investment to try and improve it.
Investment returns can also be used to offset the effect of inflation which can result in the real value of income being almost halved in real terms during retirement (5).
On the other hand remaining invested means the client is exposed to potential losses which would have a detrimental effect on income. This would be particularly pronounced if the losses occur in very early retirement. Clients who have very little capacity for loss would generally not be suitable for this approach.
