Retirement guarantees can make customers poorer

Retirement products with even a modest guarantee could return around 30 per cent less over the average retiree’s lifetime than a similar product with no guarantees, according to Milliman’s study.

The study also found that for some products, the investment performance had to deteriorate considerably and stayed that way for some time in order to provide more income than a product without a guarantee.

The Milliman’s analysis was based on the UK retirement market which had been freed from the constraints of compulsory annuity purchase and where customers were offered the opportunity to “enter a brave new world” of choosing for themselves which retirement product was best for them.

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Furthermore, the analysis proved that for a retiree 20 years into their retirement (age 85) there was roughly a one-in-seven chance a typical index-linked annuity would provide the same or higher level of income than a drawdown product with no guarantee.

Additionally, before age 85 the chance of benefitting financially from the guarantee was lower but after age 85 it increased quickly, the study said.

Also, the benefit of the guarantee also depended on the customer’s spending patterns and tended to provide the greatest benefit to customers spend their ‘savings pot’ relatively evenly across their retirement.

“Guaranteed products tend to provide customers with a steady income, therefore customers who intend to spend the majority of their savings early in retirement receive very little benefit form a guarantee,” the study said.

“Those who intend to spend less in early retirement to allow for increased expenses associated with later life may unfortunately find that the level of income provided by a guaranteed product provides only a fraction of the income they need.”

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