Want certainty and flexibility in retirement? Combining drawdown and phased annuitising provides a way for both

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• Standard Life analysis reveals a phased annuity and drawdown strategy could achieve a higher total income in retirement, with added flexibility
• Purchasing a level annuity at age 65 could provide a total income of £253,775, and £255,706 with an inflation-linked annuity, however a phased annuity approach could result in a total income of £259,115
• Phased annuity and drawdown strategy means a portion of retirement savings can remain invested for longer, benefiting from growth time
• Annuitising in phases can help reduce the impact of inflation, whilst benefiting as annuity rates improve with age

A combined approach involving both annuities and drawdown can offer those in retirement a combination of income certainty and flexibility according to new analysis from Standard Life, part of Phoenix Group.

The analysis shows that, for a second year³ running, a combined phased annuity and drawdown 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. Although this approach comes with more investment risk compared to a single annuity purchase, it balances flexibility with income certainty and the potential for growth, as a greater portion of retirement savings can remain invested for longer.

The analysis examined a saver with a starting pension of £150,000 and compared three different scenarios:⁴

1. The first scenario saw the individual purchase a level annuity with their entire pension aged 65
2. The second saw them purchase an RPI-linked annuity with their entire pension aged 65
3. The third scenario saw them take a combined approach: the individual bought a level annuity in four phases – c£90,000 at aged 65, followed by c£20,000 every five years, with the balance invested in drawdown, assuming a 5% pa investment return, and with an income of 3% a year taken from this portion of the pension

In contrast, by age 90, the total income from a level annuity would reach £253,775, compared to £255,706 with an inflation-linked annuity. While the level annuity provides a fixed annual income of £10,151 for life, the combined approach gradually increases payments, starting at £8,155 annually from age 65 and rising each year until reaching £12,065 by age 80, after which higher payments continue for life.

While an annuity purchase has traditionally been thought of as a one-time decision, there has been increased interest in the different ways retirement income can be taken to benefit pension savers, with annuity rates increasing by 2.5% since the start of 2024¹. Annuity Sales have increased 38% over the last two years² amid increasing recognition on the valuable role annuities play in providing security in retirement.

Purchasing annuities in phases through retirement allows savers to benefit from annuity rates improving with age, which can also help to reduce the impact of inflation. Starting with an effective rate of 6.6% for a level annuity at age 65, this then rises to 7.0% at 70, 8.1% at 75, and 10.0% at 80. More than half a million people are now living into their 90’s, a figure which rose by 3.7% between 2020 – 2023⁵, meaning many individuals may need a greater income for longer than expected.

Pete Cowell, Head of Annuities at Standard Life, commented: “Retirement itself is changing – people no longer expect to stop work at 65, and instead, there is increasingly a period of adjustment as people begin to work less or change roles before ceasing work entirely. 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.

Pete added: “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. We also see an increasing role for fixed term annuities, which can provide even greater flexibility and help plug any income gap between retirement and the State Pension kicking in.”

Key takeaways from the analysis:

• The level annuity provides a fixed income for life, eliminating investment risk. However, it may lose value over time due to inflation. Additionally, a one-time annuity purchase does not benefit from potential rate improvements as an individual ages. Once purchased, a level annuity also limits flexibility in accessing pension funds.
• The inflation-linked annuity offers a secure income that increases alongside inflation, protecting purchasing power and mitigating inflation risk. However, this added protection comes with a lower annuity rate. Like other annuities, the inflation-linked annuity restricts flexibility when accessing funds.
• The combined approach, involving both an annuity and drawdown strategy (with phased annuity purchases every five years from age 65 to 80), provides a higher total income overall, while adding an element of inflation protection and benefiting from gradually improving annuity rates. It also preserves some flexibility, as the portion left in drawdown remains accessible and has growth potential, though it is subject to investment risk and market fluctuations, helping to mitigate inflation’s impact.

-Ends-

Notes to editors

1. Standard Life Annuity rate Tracker: Average annuity rates increased by 2.5% since January 2024 and remain steady throughout 2024 | Standard Life. Annuity rates data provided by AMS Retirement. Accurate as of September 2024
2. Financial Conduct Authority: Retirement income market data 2023/24
3. Internal analysis conducted by Standard Life in February 2023
4. Internal analysis conducted by Standard Life in September 2024
    

Total income across the three scenarios on a pension pot of £150,000: a level annuity, an inflation-linked annuity, and a combination of staged level annuitizing and drawdown:

* Drawdown figures allow for a 5% pa investment return, 3% pa drawdown, and a healthy life throughout.
** Cumulative income by age 90, assuming 3.5% per annum inflation.
 

Total income from combined approach, including portion remaining in drawdown*:

* Drawdown figures allow for a 5% pa investment return, 3% pa drawdown, and a healthy life throughout.
 

Total income received each year via the three scenarios:

	If all used to buy an annuity		Annuitizing in stages in combination with drawdown - remains healthy throughout
Age	Level annuity - income per year	RPI-linked annuity - income per year	Income per year from combination of a level annuity and drawdown starting aged 65*
65	£10,151	£6,565	£8,155
66	£10,151	£6,795	£8,184
67	£10,151	£7,033	£8,214
68	£10,151	£7,279	£8,245
69	£10,151	£7,533	£8,276
70	£10,151	£7,797	£9,088
71	£10,151	£8,070	£9,110
72	£10,151	£8,353	£9,132
73	£10,151	£8,645	£9,154
74	£10,151	£8,947	£9,177
75	£10,151	£9,261	£10,322
76	£10,151	£9,585	£10,334
77	£10,151	£9,920	£10,346
78	£10,151	£10,267	£10,358
79	£10,151	£10,627	£10,371
80	£10,151	£10,999	£12,065
81	£10,151	£11,384	£12,065
82	£10,151	£11,782	£12,065
83	£10,151	£12,194	£12,065
84	£10,151	£12,621	£12,065
85	£10,151	£13,063	£12,065
86	£10,151	£13,520	£12,065
87	£10,151	£13,993	£12,065
88	£10,151	£14,483	£12,065
89	£10,151	£14,990	£12,065
Total income (cumulative)	£253,775**	£255,706**	£259,115**

* Drawdown figures allow for a 5% pa investment return, 3% pa drawdown, and a healthy life throughout.
** Cumulative income by age 90, assuming 3.5% per annum inflation. Total income received by Age 90 is cumulative of annuities received from age 65 to 89, not inclusive of Annual Income received on or after annuitant reaches 90.

Total cumulative income for each scenario in the combined approach: