Critical yields matter more than ever

With more people choosing drawdown these days, it’s important to monitor
critical yields throughout retirement. This demonstrates sustainability of income as required by the conduct of business rules (COBS). As your client ages and their health deteriorates, it will become increasingly challenging for drawdown to match the income that could be provided by a Guaranteed Income for Life (GIfL).

However, for a meaningful comparison, it makes sense to personalise the annuity. But often a generic figure is used that can produce misleading results. Here are some of the key factors to consider.    

 

Age

As people age, the investment returns required from flexi-access drawdown to achieve parity with a GIfL become more difficult to achieve. Estimated life expectancy also increases, which puts more pressure on drawdown. 
 

Generic Rate

Often critical yield comparisons are based on a generic GIfL rate. This may or may not bear any resemblance to the income that might be payable (based on the client’s personal circumstances). The benchmark rate of return could be set too low and as a result the income may not be sustainable.
 

Health

As clients age, the more likely it is that their health will deteriorate, which could give rise to an enhanced rate. Because we personalise our underwriting, clients receive an individual rate based on more than simply their health and lifestyle.
 

Shape of Benefits

A critical yield comparison will often include default assumptions for GIfL. For example, no dependants pension, level payments and a 5 year guarantee period. These assumptions may be inappropriate. A realistic critical yield comparison, based on a client’s personal circumstances, will help clients make better decisions.
 

Costs and Charges

It’s also important to take into account the charges and costs payable. These can erode the investments returns from drawdown quite significantly.