Reports of the demise of annuities (a guaranteed income for life in retirement have been greatly exaggerated).
And here’s 9 reasons why they are here today and will be here for a long time to come.
Since George Osborne (the then Chancellor of the Exchequer) introduced the NEW “pension freedoms” in April 2015, just about everyone has been telling me that annuities are dead and people will no longer use them to provide and income in retirement. Even some Annuity companies have suggested they will disappear. Whilst the use of them has most certainly declined since April 2015, there is still of lot of life left in annuities yet and for good reason.
Annuity rates have been on a long term decline due in no small part to the long-term decline in gilt yields helped along by Quantitative Easing, not to mention we are all living a lot longer than we used to when the concept of annuities was first invested. Despite all of the above, most people still have an absolute certainty of need for a regular monthly income throughout their retirement years, which could be for up to four decades into the future.
Don’t get me wrong, “pension freedom” has created a lot more interest in pensions, but so far, no pension provider has managed to come up with any solution that does what an annuity does – and that is, provide the peace of mind income is not only guaranteed, but will also be paid every/month/year for the rest of your life.
“Pension Freedom”
The reality, is that “pension freedom” will work best for those that a solid foundation of guaranteed income that covers the bills. Without that certainty disaster, could be just around the corner.
“Pension freedom” is great if you know what you are doing. After all, none of know what we don’t know, so getting it wrong could easily happen. In my opinion, a typical retiree needs to make the best use of their pension money and cannot afford to make a mistake by taking too much risk.
So, why do I think annuities are not dead?
- The purpose of an Annuity is to turn capital into income whilst minimising risk to any individual. On the other hand, “pension freedom” rules allow much greater flexibility over how much money is withdraw and how much risk is taken.
- Without great care and caution being taken, there is the real prospect that the pension fund could be fully used up during a person’s lifetime. That means quite literally running out of money.
- We all need income to pay the bills for the rest of our lives. On average, I would expect this to be around a decade longer than our parents.
- The providers of annuities (guaranteed income for life) offer certain returns in a world of ongoing uncertainty, economic and political change.
- Despite that, annuity providers will pay a regular income for the next 30 or 40 years.
- Annuity rates are a realistic reflection of what income a pension fund can deliver to that retiree over the long term. Taking a higher income directly from a pension fund than compared to an annuity is high risk.
- People with health issue can benefit from increased annuity rates to give them a higher level of income for life.
- Historically retirees have been risk averse when it comes to investing. Without the foundation of at least some guaranteed income retirees will be taking a risk with all of their retirement savings.
- One of the major criticism of annuities is that capital is lost on death. It has always been possible to protect the capital and today’s modern annuities offer the option of extended guaranteed periods or value protection that can ensure every penny originally invested is repaid even in the event of premature death.
In summary, “Pension freedoms” can be enormously beneficial provided there is already a guaranteed income in place or the total assets that can provide an income are substantial. So, most retirees would benefit a good level of guaranteed income and use the “pension freedom” rules to supplement their income. If you like, a bit of both.
Action call
If you are considering retirement or in the process of making a decision on how to start taking your pension income, why not contact us for a no obligation conversation about your options. You can contact us by going to our website www.miadvice.co.uk and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.
If you or your family would like to talk us about your financial plans for future, please get in touch for a no-obligation meeting.
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It is advisable to take advice from a professional financial adviser when making major financial decisions.
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The contents of this article should not be regarded as specific advice. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.
