Secure some flexibility in your retirement income

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The festive and frenzied run-in to Christmas is now well underway and if you’re anything like me you’ll probably be running behind schedule. And with less than 2 weeks to go, there will be a lot of lists being written. Some will be from children to Santa, but the important ones will be by us grown-ups. These are the lists that make sure we’ve bought everything we need so that everything goes off without a hitch.

On these lists we’ll have the essentials, the things that we absolutely must have. And then there is the special things, the presents. Who do you buy for? How many presents will they get? And there’s always that one extra you have to buy just in case someone surprises you. If you’re like me then you probably set yourself a budget on what you want to spend, based loosely around what you paid out last year. Apparently families are on course to spend an average of almost £800(Opens new window) celebrating Christmas this year. But in my last minute rush to get things sorted I’m struggling to stay on track.

Unfortunately it seems that the way many of us approach Christmas – last minute and haphazard – is the same way many approach retirement planning and this makes it more difficult to achieve the retirement income needed to enjoy the lifestyle we want in later life.

Changing behaviour around retirement

In the past the majority of people retired on a set day, bought an annuity and lived off the guaranteed income it provided. Today things are different and we’ve moved away from a single retirement date to a much more phased approach where people transition into retirement, reducing the amount they work over a period of time.

This transitional approach affects the amount of income clients will need to generate from their pension savings and there are then the unexpected changes in circumstance that will also affect their financial needs. 

To cope with this your clients need a retirement income that’s flexible enough to see them through the ups and downs while generating a base level of income they can rely on for their ongoing costs. 

Today’s more elongated approach to retirement makes it important for clients to think about what they’ll need each year and to actively set a budget according to their essentials, desirables and luxuries for the next 12 months. It’s not as difficult as it sounds and online tools like our Retirement Needs Calculator(Opens new window) make doing the maths a quick and painless process.  

The next question then is how to create a flexible level of retirement income that caters for these changing needs each year. The answer is to generate a blend of secure and flexible income and although this isn’t a new concept, it’s something that a lot more people are looking at following the introduction of the new pension freedoms.

Guaranteed retirement income options

Instead of examining all of the retirement income choices available, I’d like to focus here on the guaranteed income options and to outline how annuities compare to the newly created option of secure drawdown.

A traditional annuity provides a guaranteed income for life and your clients’ age and health will determine how much they pay for that income. The annual amount they receive is fixed and cannot be altered in light of changing needs or circumstances. An annuity also offers very limited and often costly options to pass money on to loved ones after your clients die.

The alternative is secure drawdown and this too offers a guaranteed income for life. Using this option the same amount of money is likely to guarantee your clients a lower income than an annuity, but their money remains invested and this is the key difference.

It means that when they die, any remaining savings can go to their beneficiaries. Staying invested also creates flexibility while they’re still alive and if the value of their investments rises they may be able to increase their guaranteed level of income. In the event of their circumstances or needs changing they can also access their money at any time. 

Secure Retirement Income

Earlier this year we launched our Secure Retirement Income (SRI) solution for investors aged between 45 and 74 who have between £20,000 and £1 million to invest – it’s available on our Aegon Retirement Choices and Aegon One Retirement propositions, providing all of the benefits of secure drawdown on a platform. 

When a saver opens their SRI account, their original investment is called their income base. That income base can increase over time if the fund they’re invested in does well. The higher a saver’s income base, the greater the level of secure income they’ll get.

When a saver decides to start taking an income, we calculate what they’ll get by multiplying their income base by an income rate percentage determined by their age when they start the income. You can see our current income rates here(Opens new window).

All of this means that guaranteeing part of your clients’ retirement income doesn’t have to come at the expense of financial flexibility. And given changing needs in retirement it’s certainly something they should consider. Just don’t let them leave it until the last minute...

Photo of blog author Gavin Casey, Distribution Director

Gavin Casey

Distribution Director