Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Picking your perfect retirement income product
I’m often asked which pension product is the ‘best’ for retirement income investors, and my answer is always the same: ‘If only it were that easy!’
What matters is choosing the product – or mix of products – and investments that best suit your needs and appetite for risk.
According to PWC research, around two-thirds of people cite certainty of income as an important factor in determining how to manage their pension pot, while 61% point to tax efficiency and life expectancy, and 41% investment risks.
Other things mentioned include current health, inflationary risk, simplicity of the product and the ability to leave something behind to loved ones.
It’s worth thinking about how important each of these is to you when building your retirement income strategy.
What about actual returns?
Consultant The Lang Cat has modelled how well someone with £100,000 to invest 25 years ago would have done if they’d bought an annuity, a guaranteed drawdown product, a ‘third-way’ product, or gone into drawdown.
If you think of retirement income as a spectrum, annuities – offering a guaranteed income for life – sit at one end. Drawdown – where your money is invested in the stock market – is at the other end.
Guaranteed drawdown is usually more expensive than ‘standard’ drawdown and allows you to lock-in investment growth, while third-way products combine annuities and drawdown in one tax wrapper.
It is important to remember that past performance is no guide to the future and investments can go down as well as up.
Also, the research has used a number of assumptions which mean the final numbers are purely indicative. The assumptions include charges, how you invest your money and annuity rates.
Tell me the results
Our annuity investor got £116,000 over the period, while someone who bought a third-way product would have received £225,000 (income of £125,000 and a final pot value of £100,000).
Someone who bought a guaranteed drawdown product would have got a whopping £259,000 in total. This was broken down into £167,000 from income and a final pot value of £92,000.
Drawdown was the runaway winner, delivering total returns of £336,000 – £135,000 of income, plus a final pot value
The results demonstrate the potential power of investing over the long-term, but remember you’ll probably have to put up with choppy waters along the way.
Ultimately, which product you choose should depend on your retirement goals and willingness to take on investment risk.
AJ Bell Analyst