25th July 2014
The regulator has condemned them for being poor value and the chancellor has told retirees they’ll not longer have to buy one, but annuities should not be dismissed outright in retirement.
Annuities have had a tough year, in February a report by the City watchdog revealed 80% of retirees had not received value from their annuity – which are essentially insurance policies against living too long – and in March chancellor George Osborne opened fire by declaring: ‘Let me be clear. No one will have to buy an annuity.’
Consumers could be forgiven for thinking that annuities have no place in their financial plan and that drawdown, where you pension pot remains invested and you take an income from it each year, is the most suitable solution.
However, the reality is that securing an income for life, which annuities offer, will be the right decision for a number of people, especially those who do not want to take the risk of staying invested in the stockmarket.
Despite the negative press around annuities new research by True Potential Centre for the Public Understanding of Finance published in a report by the International Longevity Centre-UK (ILC) shows annuities can be good value for retirees.
Twenty-five years ago if a retiree wanted to secure a £10,000 pension income from an annuity, they would have needed a pension pot of just £65,000 but today that figure is over £175,000.
Jonquil Lowe of the True Potential Centre said this has led annuities to be labelled poor value but she said consumers are failing to factor in the ‘insurance value of annuities, particularly in the face of increasing longevity’.
Annuity rates have also suffered due to falls in gilt yields, which they are pegged to, and Lowe said low gilt yields plus increasing life expectancy account for 97% of the downwards trend in annuity rates.
Women are more likely to receive better value for money from their annuity than men, purely for the fact that women live on average longer than their male counterparts. Lowe said even the poorest annuity rates deliver better value for women.
‘The results suggest consumer detriment to those male annuity purchasers who end up on the worst rates, but otherwise a product that is generally deliver value for money,’ said Lowe.
She added: ‘This much maligned financial product should ideally still play a key role in most people’s retirement planning and in the free, impartial guidance for every retiree promised as part of the government’s pension liberalisation package.
‘A fall in annuity rates associated with increasing life expectancy does not equate to a fall in value for money, rather it represents a spreading of value over a longer period.’
It is true that not all annuities are good value but consumers do have the right to exercise the ‘open market option’ (OMO). While many savers believe they have to buy an annuity from their pension provider, this is not the case and everyone has the right to exercise the OMO and shop around for the best annuity deal.
David Sinclair, ILC director, said retirees should not rule out annuities but ensure they search the market for the best annuity rate and the best annuity to suit their circumstances.
‘The research dispels the argument that consumers should automatically shun annuities on the basis of value for money. But given the gap between the best and worst annuities in terms of value for money, it is vital that we continue to encourage and support retirees to shop around in order to get the best value annuity,’ he said.
MGM Advantage pensions technical director Andrew Tully said retirees should not only shop around but consider their health and lifestyle when looking at annuity options as those with pre-existing health conditions or who smoke can get more money by buying an ‘enhanced annuity’.
‘People who have shopped around in the open market and have then gone on to purchase an annuity, especially where health and lifestyle is taken into account, are receiving good value,’ he said. ‘Unfortunately we have witnessed far too many people staying with the company they saved with and this is where the bulk of the problems arise. If this behaviour continues in the new world then all the additional flexibility being introduced will have failed to deliver better customer outcomes.’
If you are unsure about what retirement solutions are best for you, then seeking independent financial advice is the best course of action. You should take into account whether you have the right tolerance to risk to gamble some of your savings on the stockmarket and other elements of your finances, such as debt, that may make taking your pension out in cash an attractive proposition.
‘Annuities may not be the right option for everyone. Other strategies and products may be more suitable for those with higher risk tolerance, greater resources and/or a desire to leave bequests. Those with low resources who can expect a high proportion of their income to come from their state pension and those with debts may still prefer to forego a pension income for a lump sum,’ said Sinclair.