Annuities: Myths, misconceptions & mistakes

Posted on January 21st, 2014 | Categories - Annuities

iStock_000016454287_ExtraSmallAnnuities have hit the headlines over the past few weeks and whilst the quality of journalism is usually pretty good, the same cannot always be said for readers’ comments which accompany online articles.

We thought it would be fun to take some of these comments and expose the myths, misconceptions and mistakes we’ve found.

“Annuities are not fit for purpose, avoid them like the plague.”

One of the more hysterical comments we came across!

There’s no denying rates have dropped over recent years, but an Annuity is still fit for purpose, if your aim is to generate a guaranteed income for the rest of your life and that of your spouse, if the option is included.

For other people though, who might be prepared to take a degree of risk with their capital, or who want more flexibility, an alternative such as Income Drawdown, a Fixed Term Annuity or an Investment Linked Annuity, might be more appropriate.

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Whether an Annuity is right for you is down to your own individual circumstances; to make a sweeping generalisation the like of which we’ve seen here is simply wrong.

“The problem is that because Enhanced Annuities are available for those in poor health, the insurance company assumes that everyone taking a standard Annuity is in perfect health.”

This comment perpetuates one of the biggest myths about Enhanced Annuities; that you have to be in poor health to qualify.

Many people, who perhaps have one or two relatively minor medical conditions, such as raised blood pressure or high cholesterol, will qualify for an Enhanced Annuity, but would never describe themselves as in ‘poor health’.

Only by telling an independent adviser everything about your health, even if you feel fit and healthy, will you find out whether or not you qualify for an Enhanced Annuity and consequently receive a higher income.

“Pension schemes are inflexible and expensive. While they offer tax relief, monthly Annuity payments are subject to income tax. Far better to use a stocks and shares ISA which is always tax-free.”

Again, it’s a case of ‘horses for courses’.

Sure, pensions are not as flexible as ISAs; you can’t get access to the money until you are 55 and then only 25% can be taken as a lump sum, with the rest providing you with an income. But on the flip side, your employer won’t contribute to your ISA, but they will usually pay into your workplace pension; in fact they will be forced to over the next few years.

To say ISAs are better than pensions is like saying an iPad is better than a laptop, or a petrol car is better than a diesel car; it all depends on your own individual circumstances.

The most effective solution is often using a combination of both ISAs and pensions.

And one last point, there’s no guarantee that ISAs will always be tax-free!

“It’s a disgrace that the law requires us to take out one of these rotten Annuities.”

It’s probably not worth debating whether or not Annuities are “rotten”, but the myth that you have to buy an Annuity with your pension really does need to be put to bed once and for all:

  • There is no longer any rule which says you have to buy an Annuity
  • You never have to buy an Annuity
  • It’s no longer compulsory to buy an Annuity 

You get the picture!

Of course thousands of people still decide to use this option to turn their pension pot into an income. For some people it’s the right choice, whilst others buy an Annuity simply out of ignorance, perhaps believing this myth or because they are unaware of alternative options.

“Simple solution: don’t buy an Annuity, go into Income Drawdown instead.”

Can you see a pattern developing here? Yes another sweeping generalisation

Annuities and Income Drawdown are not inherently good or bad options, simply appropriate or inappropriate given your circumstances.

Only by looking at all retirement income options can you possibly make an informed decision, or indeed be advised, which is the right option for you.

“Guidance is free, advice costs money.”

There are three ways to buy an Annuity:

  • Direct from an Annuity provider
  • Through a non-advised Annuity broker, which is sometimes known as ‘guidance’
  • After taking advice from an Independent Financial Adviser, IFA for short

If you go direct, you will still be charged a commission (no discounts here for cutting out the middleman) except it will simply be pocketed by the Annuity provider.

If you take the non-advised or guided route, again commission will be payable; the exact amount is decided by the broker and the Annuity provider.

If you use an Adviser, no commission is payable, but you will pay a fee which is agreed between you and the adviser.

So, guidance isn’t free and what’s more, it can often be more expensive than paying a fee.

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If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk