By Daniel Hunter
Income drawdown can be used to increase retirement incomes by up to 20%, says the Deloitte, the business advisory firm.
However, product innovation and educating employees about the benefits and risks are crucial to developing the market.
For example, a 30-year-old member of a defined contribution scheme earning £30,000pa could end up with a pension fund of £300,000 and generate a retirement income of about £11,500pa. Using income drawdown to delay buying an annuity for 10 years could produce an average annual income of about £13,500.
“Income drawdown is misunderstood, underused and undervalued. It accounts for about 15% of the UK’s £11bn annuity market but its use could become more widespread if providers develop products that generate higher levels of income and protect capital," Richard Slater, partner at Deloitte, said.
“Falling annuity rates caused by increasing longevity and low interest rates are making alternatives ways of generating a retirement income more attractive. About 400,000 people buy an annuity every year and many could increase their retirement income by using income drawdown.
“It will not suit everyone and savers will need to take financial advice, but it allows retirees to live off the income generated from their pension fund and delay buying an annuity to get better value. However, people must remember that there is a risk that annuity rates don’t improve or worsen.
“We see a significant trend towards more flexible retirement planning but providers need to do more to develop products that focus on producing a higher income than annuities but that also protect capital. Companies and providers should do more to educate members of money purchase corporate pensions about using drawdown as a more flexible approach to retirement.”
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