A Premature Obituary for Annuities

Annuities – consigned to the past or due a renaissance? Well, it’s not as simple as that.

I’m reading more and more that the initial reports of the death of the annuity have been a little premature.

The latest piece to catch my eye appeared recently in Financial Adviser. Written by Colette Dunn and Marie-Lise Tassoni of actuarial consultancy Milliman, the article asks if annuities can make a comeback after their sales dropped off a cliff as a result of pension freedoms.

The article is based on figures from the FCA’s Retirement Outcomes Review which suggest that the popularity of drawdown is in no small part down to the perception that it presents the ‘path of least resistance’ to taking the tax-free lump sum from pension savings. 

The argument then goes that if we assume that the majority of retirees are risk-averse when it comes to their pension pot, it is unlikely that people will continue to make product decisions when they retire that work for the 25 per cent of their pot they can access immediately but don’t necessarily suit their needs for the remaining 75 per cent.

This point seems to be reinforced by the fact Morningstar research recently suggested that lower initial safe drawdown rates should be somewhere around 2.5 or 3 per cent for UK retirees if they want to be sure that they don’t run out of money – all well and good, but you can currently guarantee that you don’t run out of money with an annuity with inflation protection paying more than 3 per cent.

However, as ever, aren’t we oversimplifying things with this ‘either/or’ approach to annuities and drawdown?

If your retirement is going to last for 30 years, during which you might initially keep working for a few years, it seems unlikely that your retirement income needs are going to stay the same throughout.

Would it better suit you to guarantee an income with an annuity for a fixed period of time while leaving the rest of your fund invested and benefiting from returns? Nowadays not all annuities are for life.

Do you think you might actually be in a better place make decisions about the majority of your pension pot when you have a better picture of what retired life might look like?

With these questions in mind, the conclusion has to be that the value of high quality on-going professional financial advice has never been higher for people with choices to make as they approach retirement.

Retirement is changing (and so are retirement products) as people live longer and fewer of them give up work with a ‘gold-plated’ final salary pension, but that doesn’t mean that we need to ignore everything we have learned about turning pensions into an income. A professional adviser will help to match your current and future needs with the right products (old and new).