When George Osborne announced Pension Freedom some two years ago, many people predicted the end of the Annuity, suggesting that the new found freedoms would make the traditional way of turning a pension pot into an income obsolete.
So, one year on from the start of Pension Freedom, has the humble Annuity died the death that so many predicted?
New research from Retirement Advantage helps us answer the question, but before we look at that in more detail, it is worth quickly reminding ourselves how an Annuity works.
Annuities – the basics
In simple terms an Annuity is a plan, bought at retirement, with some or all of your pension pot, which will then provide you with a guaranteed income for life and that of your spouse if you die before they do and you have made provision for them when the plan was set up.
Other options can be added, for example a guarantee period and indexation to help protect against inflation.
The advantages of an Annuity include the fact the income is guaranteed and can never be reduced, the needs of spouses and dependents can be catered for and it is a relatively simple product which does not require regular reviews.
However, disadvantages include the fact that it can never be changed and Annuity rates are historically low.
So, are Annuities dead?
According to the research by Retirement Advantage, the highest priority for those people approaching retirement was certainty, with 43% putting this at the top of their ‘wish list’.
Significantly fewer people, 33%, said that flexibility was their main priority.
It seems therefore that certainty of income trumps other requirements and the latest buying patterns of consumers reflect that.
Recent figures released by the Association of British Insurers (ABI) shows that in the latest three-month period the number of Annuities bought (21,200) outstripped the number of Income Drawdown contracts (19,700).
It seems therefore, that based on the evidence from Retirement Advantage and the ABI, the death of Annuities has been exaggerated and that it is still a popular way for many to turn their pension pot into an income.
Commenting on the figures, Andrew Tully, Pensions Technical Director, Retirement Advantage: “Knowing that there is a guaranteed income coming in to pay the bills continues to be a real comfort to many retirees. Even among customers taking advantage of the blended products now available, we’ve found that 60% of their funds are allocated to the guaranteed annuity element.”
“It is the change to death benefits available within Annuities which has led to people seeing them in a new light. Where previously guarantees were only available for up to 10 years, since last April providers have offered longer guarantees of up to 30 years or 100% value protection. These improvements address the most significant historic criticism of Annuities as it provides confidence their families will get their money back, whatever happens. Three quarters of our annuity applications include some form of guarantee, which increases to over 90% when Annuities are purchased within Drawdown.”
Those people looking for certainty, and therefore considering an Annuity, have though been warned about possible dangers.
For years’ financial experts have implored would-be pensioners not to buy their Annuity from their current pension provider and to consider whether or not they qualify for an Enhanced Annuity, which can provide a higher income to those people suffering from ill-health or certain medical conditions.
However, that message still doesn’t seem to be getting through, in fact Retirement Advantage calculate the income lost by people not shopping around in the first six months of Pension Freedom could amount to over £100 million.
Furthermore, the Retirement Advantage research found that 63% of Annuity purchasers did not take financial advice before committing.
Andrew Tully again: “People are failing to seek advice and therefore not shopping around for either an Annuity or Drawdown product. This situation has actually got worse since Pension Freedom and the market is clearly failing consumers. Not only are those purchasing annuities missing out of the best deals, but there is a real risk that retirees will go into Drawdown who don’t have the necessary capacity for loss or a suitable risk appetite. While Drawdown is not a one-off purchase, it is still important retirees seek professional advice, as they could easily be caught out by high charging or complicated products.”
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