Do annuities still have their place
It has emerged this week that the annuity market has taken a devastating blow, with annuity rates falling to their lowest ever levels.
So as annuity rates hit record lows, is there still a place for the product when considering your retirement income planning?
Since 2008 there has been a major decline in annuity rates, with reports showing an almost 30 per cent drop. Even going back as recently as the start of this year, we can see a decline in rates, as the average annual income for a 65-year old with a £10k pension fund has dropped 5.9 per cent, while those with a £50k pension fund will see a 6.4 per cent decline.
In the 2014 Budget speech, the Chancellor George Osborne announced radical reforms to the way we access our pension funds; the pension freedoms allowing unrestricted access to savings, where previously the majority of retirees had been left with no choice but to purchase an annuity due to income requirements to be eligible for other options.
These new reforms came into effect on 6 April 2015, and this news about annuity rates shortly follows the change in the market.
The blame has been put on both dwindling yields linked to government bonds, and a lacklustre uptake in the purchase of annuities as retirees waited for the new pension freedoms before making a decision on their financial futures.
Yet despite the negative reports and the decline in rates, many believe that the annuity – which offers a secured, regular income either for life, or over a fixed period – could enter a new era following the reforms, with arguments that their place in retirement plans must to be carefully considered before people write them off for good.
Billy Burrows is an independent commentator on annuities and pensions, and, in sponsorship with Partnership, has recently published a new report titled ‘The Case for Annuities’.
Burrows believes, as do many industry insiders that there is still a vast majority of people for whom the annuity will remain the ideal retirement income option. This is down to the security and peace of the mind that the product offers to a retiree, with no risk of being left without an income – as could be the case if people are left to manage their own money via income drawdown or other methods.
Research from the International Longevity Centre-UK showed that the majority of people approaching retirement were more likely to favour an annuity style product than any other retirement income method; in a survey they conducted, almost 70% of all respondents favoured a secured income option.
As Burrows explains, “It is important to separate the benefits of annuitisation from the poor image associated with some annuity policies. The case for annuities can be made strongly on a number of fronts when the benefits, such as a guaranteed income for life, are examined and the outcomes compared to products such as drawdown”.
The constant reports of declining annuity rates, while having an impact on the uptake of annuities – and we were always going to see greater consideration of the new options available to retirees – do not mean that we can write off annuities as an essential part of retirement income planning.
The new pension freedoms even allow pensioners to introduce an element of ‘mix and match’ to their planning: You may benefit from taking larger amounts via income drawdown at the start of your retirement - possibly for holidays, home improvements or debt clearance - before settling into a secured annuity income later in life.
Clearly there is still a place for the humble annuity in your retirement planning, and with over 400,000 annuities, worth around £12billion sold each year, it’s clear that many others agree too.
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