As the issue of rising inflation hits the headlines the general public are quite rightly worried about its effect on their spending power. While this is undoubtedly a real concern at least the working public have the prospect of wage increases to meet these rising costs.
However, the same cannot be said for many of today's retirees. Rapid rises in food and energy costs have long outstripped inflation leaving many pensioners having to budget ever more carefully to maintain their standard of living.
As a result they need their retirement income resources to work harder than ever to make up the shortfall. While those who have invested in products such as drawdown can hope that any investment uplift they receive will go some way to meet rising costs, what happens to those people who have locked themselves into a level annuity? Many people choose level annuities because they want certainty of income with no investment risk. However, what many don't understand is that what might seem like a perfectly reasonable income at 65 will have a much depleted buying power ten years later.
Advisers need to work closely with their clients to ensure they understand the impact inflation can have on their pension and go through the different options available to combat it. The good news is that there are plenty of options available. While drawdown allows investors to continue to benefit from market gains, investment in one of the new third way products also allows you to build in guarantees. There is even room for man-oeuvre in the annuity market. With-profits annuities for instance also allow retirees to benefit from investment gains while impaired annuities will give a higher overall income to those suffering from certain health conditions. There are also inflation linked annuities available which start the retiree on a lower income in the earlier years which grows to account for inflationary changes. However, these products have attracted criticism as the starting income is often so low that it would take several years for the investor to attain any real benefit.
It's important to note that securing at-retirement income is about more than just buying a product. With a bit of planning advisers can really help their clients to enjoy an income that meets their needs and it is increasingly the case that a variety, rather than just one product will be used for this purpose. Rather than putting all your client's money in annuities or drawdown we are increasingly seeing advisers use a mixture of both. At least that way the client gets the best of both worlds - an element of secure income alongside the potential for investment growth. Equity release is another option available to meet client's income needs.
While today's retirement specialist advisers have a great responsibility in helping clients plan their long term income it's great to see they have so many options at their disposal.
Partner Insight: Introducing the Architas education series for clients.
'Fewer than 1% of firms PROD-compliant' - Rory Percival
'Left holding the can'
'VCTs and EIS compared' panel
Letter to Women and Equalities Committee