Over the past few years Annuities have received a bad press and to be honest, much of the criticism was fair.
When George Osborne stood up and delivered his Pension Freedom Budget in 2014, many people predicted the end of Annuities. However, since then two things have happened:
- Annuities are still a popular option. In fact, latest figures show more people are choosing to use an Annuity when they retire than the main alternative; Income Drawdown
- Many Annuity providers have responded to Pension Freedom by updating their plans with new options, for example extended guarantee periods
However, one thing which hasn’t changed is the appallingly low numbers of retirees shopping around for the best Annuity rate. According to the FCA, around two thirds of retirees still buy their Annuity from their existing pension provider, who, of course, may not offer the most competitive rates.
With so many retirees failing to shop around, it is clear that key messages, are not getting through. Commenting on the issue, Andrew Tully, Pensions Technical Director at Retirement Advantage, said: “The message that Annuities have changed isn’t well known unless you receive financial advice, which could potentially mean people ignore them because of out-of-date preconceptions. It’s important that retirees are fully aware of the value Annuities provide. And it’s vital that everybody receives professional financial advice so they can make the best decisions for their personal circumstances.”
Annuity myths
An Annuity is perhaps the simplest way of concerting your pension pot into an income, which is guaranteed for the rest of your life, and that of your spouse if you select that option.
However, many myths still persist, which perhaps is partly behind the low numbers of people shopping around at retirement.
Retirement Advantage has produced a helpful list of eight common myths and suggested the alternative reality:
Myth #1: “Annuities are poor value.”
Shopping around, rather than accepting the offer made by your pension company, can improve your income significantly. The difference between the best and worst annuity rate in the open market is currently around 33%1. Unfortunately, only a third (36%) of people are currently shopping around, and therefore people are missing out on millions of income2.
Myth #2: “The pension company keeps all the money if I die.”
Since April 2015, providers have offered guarantees of up to 30 years or 100% value protection, so customers can be sure that their families will get their money back, and more if a longer guarantee is chosen.
Myth #3: “I can’t leave my annuity savings to my family.”
Customers can arrange for the original annuity purchase price to be paid to their beneficiaries (minus payments made), and if they die before age 75 there is no tax payable.
Myth #4: “I’d be better off managing my own money.”
People want the security and peace of mind that only a guaranteed income can provide.
Myth #5: “I could get a better income using drawdown.”
Drawdown is sensitive to volatility in the stock market; Retirement Advantage analysis shows that customers could have seen 5% wiped off the value of a typical drawdown fund in a year3. While drawdown can produce a higher income there is also a risk that income could fall, and managing your money to last through retirement carries its own risks.
Myth #6: “Annuities are a one off purchase.”
Customers can use pension savings to stagger the purchase of annuities to fit with the transition between work and retirement. Or phase purchase from drawdown funds in retirement.
Myth #7: “I can’t change or stop the income from my annuity if my circumstances change.”
Using new ‘hybrid’ retirement account products, customers can redirect income from annuities into drawdown, for example if they return to work. This gives complete income flexibility while receiving a guaranteed income for life.
Myth #8: “I won’t live long enough to worry about buying an Annuity.”
Average life expectancy for men aged 65 is 21 years, meaning they will likely live until they are 86 years old, while for women it is 24 years, meaning they will likely live to 89. Remember, these are just averages, you have a one in four chance of living till 94 if you are a man and one in four chance till 96 if you are a woman.
We are here to help
Of course, an Annuity isn’t right for everyone, another option, such as Income Drawdown may be more suitable.
That’s why independent financial advice is so important, to make sure the right option is selected.
We are here to help, whether you are close to retirement, or have already stopped work, Sarah and Bev are here to help you choose the right option for you.
Contact them on 0115 933 8433 or email info@investmentsense.co.uk to arrange an initial chat.
