A phased annuity and drawdown strategy could achieve a higher level of retirement income, new analysis from Standard Life has found.
The analysis showed that, for a second year running, a combined strategy can produce the highest overall income throughout a 25-year retirement. By age 90, the total income from a combined approach could yield £259,115.
The analysis examined a saver with a starting pension of £150,000 and compared three different scenarios. If the saver purchased a level annuity with their entire pension aged 65, their total income would reach £253,775 by age 90, while purchasing an inflation-linked annuity with their entire pension would provide £255,706.
In contrast, purchasing a level annuity in four phases, starting with £90,000 at age 65, followed by £20,000 every five years, with the balance invested in drawdown and assuming a 5% annual investment return with an income of 3% a year taken from this portion, would amount to £259,115 by age 90.
While this approach comes with more investment risk compared to a single annuity, Standard Life said it balances flexibility with income certainty and the potential for growth, as a greater portion of retirement savings can remain invested for longer. It also allows savers to benefit from annuity rates improving with age, which can also help to reduce the impact of inflation.
Pete Cowell, head of annuities at Standard Life, said: “While most of us want the security of knowing that our income will be maintained at a certain amount, the chances are many of us won’t have saved quite enough to ignore the need for further investment growth. The good news is that there is now increasing recognition around how using a combination of different solutions can often better meet people’s needs.
“Having an element of guaranteed income can be an important part of the retirement mix and with people living longer, the case has never been stronger. Supported by strong annuity rates, we have seen an increase in annuity sales over the last year, which demonstrates how people are looking for certainty from their retirement income. This is a trend we expect to continue into 2025 and beyond, especially considering the recently announced changes to include pensions in scope for inheritance tax, which make annuities more appealing due to emphasis on drawing an income.”
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