It’s thought that annuities have gone out of favour and drawdown products are becoming increasingly tempting to members, we explore if a hybrid of the two would better protect against longevity risk

Longevity risk was identified as the biggest risk to members’ retirement income in our survey. This was a concern for the majority of our respondents, with one scheme saying: The survey findings also show that the idea of a secure income in later life, combined with income drawdown in the earlier stages is attractive or very attractive, and this approach could certainly ameliorate concerns around running out of money.

“Members are unable to predict how long they are going to live for and what their income needs will be towards the end of their lives.”

While a hybrid approach would certainly combine the desirable goals of flexibility in early retirement, paired with a ‘guaranteed income’ for later life that schemes are looking for, correct product design is crucial. Consultants are confident that there is market demand for some sort of hybrid product which combines deferred annuity with drawdown. But how would the building blocks of this strategy work?


Anthony Ellis, partner at Hymans Robertson thinks the drawdown part needs to combine five things: Longevity protection, flexibility to accommodate changing plans, ability to drawdown variable amounts of funds, ability to participate in markets, and some form of guaranteed income protection, minimum return or growth of fund size.

He says: “A strategy that uses a proportion of a member’s fund to build up a deferred annuity (to be accessed at some stage, typically mid 70’s) in advance of retirement would provide protection against longevity.”

Half the respondents to our survey say the deferred annuity should start at age 75. Ellis says: “Sequencing risk can effectively be managed by allocating a rolling portfolio of low volatility assets to be drawn from for short term cash requirements. This can be combined with a decreasing allocation to more “return seeking” assets as the member approaches an age whereby their annuity purchase is executed (for some or all of their remaining fund).”

He believes that members’ ‘optimal’ annuity age will vary as will their fund size and thus their ability to drawdown over time. But he thinks that a default strategy could usefully be determined by implementing the structure outlined above and applying fi xed proportions of the fund size (at outset) to deferred annuity build up, low volatility (for short term draw down requirements) and longer-term return seeking assets.

“An effective advice (robo or otherwise) strategy overlying this structure would further improve outcomes for members,” he adds. Andrew Cheseldine, partner at LCP believes that it is vital not to refer to the deferred annuity as an annuity but simply as an insured guaranteed income available if you live unto age X.

 Cheseldine expresses the caveat that members typically don’t want to pay the insurance premium up front. He thinks they are much more amenable to a deduction from their regular income between retirement date and the date the insured income kicks in.

To be effective (at least in communication terms) the deferred income needs to be guaranteed.

He goes on to explain things to consider when designing such an offering: “To be effective (at least in communication terms) the deferred income needs to be guaranteed. In UK compliance terms that means insured and subject to FCA scrutiny, so solvency rules are the biggest hurdle to overcome.

Apart from that, it is probably as simple as finding a new name for an annuity without all the negative PR baggage currently attached to it.” There is clearly an appetite there for hybrid annuity and drawdown products, and providers are currently working on their offerings. Schemes and trustees should start thinking about how best to give their members access to these strategies.

This article is part of a special report on Retirement Income, sponsored by State Street Global Advisors

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