Technology supplier IRESS has launched an index that allows advisers to compare the relative performance of annuity yields against cash and equity yields as well as against a “fair sustainable withdrawal rate”.
The IRESS Relative Annuity Yield Index compares the income yield of annuities with cash ISA rates and an example of a UK Equity Income fund as well as with what would be considered a sustainable withdrawal rate.
The index’s cash comparison was calculated by taking the annuity yield, minus the average cash ISA rate over 12 months, while the comparison the equity income was calculated based on the average 12-month yield for the UK Equity Income sector less the average annuity rate for that year.
For the third measure in the index, IRESS UK managing director Simon Badley (pictured) explained: “We needed a representative portfolio that someone retiring might reasonably hold – 40% invested in equities, with the rest in bonds and cash.
“We also required a withdrawal or income rate that offers a reasonable chance of success in terms of it lasting 25 years, which is a realistic expectation for someone retiring in their mid-60s – remembering, of course, that enhanced annuities can offer far better rates than standard ones.”
IRESS picked Morningstar’s estimated 4.5% as the sustainable withdrawal rate that fitted the required 40% exposure to equities with a 50/50 chance of success, taken over 25 years.
Badley said: “This sustainable withdrawal rate is only slightly below the current annuity rate of 4.83%. With a probability of success at 50%, however, this means there is as good a chance of failure – that is, the ‘income’ runs out before death – as success – that is, having some of the fund left after 25 years).
‘Absolute certainty’He continued: “The yield performance on annuities, especially against an independently calculated sustainable withdrawal rate, serves as an important reminder they continue to offer a valuable option for investors looking for absolute certainly in retirement.
“It is true the negative commentary and falling rates over the years may have made annuities appear less attractive in comparison to other options for retirement income, but industry opinion suggests a plateau has now been reached.
“It now appears the retirement market is readjusting to a new ‘normal’, following the dramatic swings in the wake of the pension freedoms. The relative value of annuities assessed against other retirement income options deserves a fair hearing and we hope the IRESS Relative Annuity Yield Index helps deliver a new context for comparison.”
Bradley suggested that, with the government’s focus apparently set on the UK’s retirement planning for the foreseeable future, further evolution in the market was inevitable.
He added: “Against this backdrop of change, the IRESS Relative Annuity Yield index is the first in a series, which will be published every six months as part of our Retirement Reports, to track the progress of annuity yields against this wider market context and chart the continuing shift in the UK retirement landscape.”
The post IRESS launches annuity yield index as comparison tool appeared first on Retirement Planner.