Marie BRIERE,
Research and Macro Strategy, Head of the Investment – Research Center at Amundi

« An ideal decumulation solution for retirement should be flexible and tailored to individuals’ needs.»

« An ideal decumulation solution for retirement should be flexible and tailored to individuals’ needs.»

« An ideal decumulation solution for retirement should be flexible and tailored to individuals’ needs.»

Today, two solutions are offered in most countries for the decumulation period: annuities or scheduled withdrawal strategies. Taken in isolation, neither one is perfectly suited in terms of an individual supplemental retirement savings solution. The main advantage of an annuity is to offer longevity insurance. However, fixed nominal annuities do not offer protection against inflation or allow individuals to continue investing in risky assets to achieve potentially higher benefits. They are also irreversible, warned Ms. Brière. Individuals often prefer scheduled decumulation  strategies through which they select a withdrawal formula for their funds for their entire retirement. But this solution offers no longevity protection. In the United Kingdom, the 2014-2015 reform (“Pension Freedom”) eliminated mandatory annuitisation and caused the total value of contracts sold to fall dramatically in favour of scheduled retirement strategies.

THE IDEAL DECUMULATION SOLUTION

The best retirement solution uses two types of products: annuities and investment solutions, she suggested. The theoretical work on this subject recommends a gradual annuitisation strategy through which individuals keep their capital invested in risky assets for a long time after retirement in order to continue benefiting from the associated risk premium and additional yield. The other advantage of gradual annuitisation is that it does not force individuals to take the irreversible decision to convert all of their assets into an annuity on the day of their retirement.

INDIVIDUALIZATION AND FLEXIBILITY ARE KEY

By being able to mix and match the two product types, individuals will be able to choose the solution that best suits their situation for basic and supplemental retirement coverage, accumulated capital, liquidity needs, family situation, consumption requirements, desire to leave money to someone, and so on. Individual needs are different but typically combine three main objectives. One is to secure essential consumption needs, which are usually high in early retirement, then fall and rise again at the end of life. The second is to cope with liquidity needs in case of unforeseen expenses; and the third is to transfer capital to heirs.

Flexibility permits tailoring the annuity-conversion strategy to market conditions and temporarily stopping annuity conversions when the rates are low and the annuities are costly. This is currently the case. We are living longer, and retirements are getting longer as well, Ms. Brière pointed out. In this context, combined with exceptionally low interest rates, the retirement phase must be conceived of as an active investment phase during which we can continue engaging in projects, while progressively providing for our consumption needs at the end of our lives.