Consumers fail to understand benefits of annuities

23 Jun, 2016

Retirement Advantage is warning that despite the renewed popularity of annuities following the introduction of pension freedoms, out-of-date myths about the product continue to abound.  The company is urging people to get professional financial advice before making any decisions about their pensions.

Andrew Tully, pensions technical director at Retirement Advantage, commented: ‘The pension changes have created huge interest in the market, and companies have responded with new product options. The annuity, the only sure fire bet of a guaranteed lifetime income, has also received a make-over, which has addressed many of the concerns people had about the product.

‘However, 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isn’t well known unless you receive financial advice, which could potentially mean people ignore them because of out-of-date preconceptions.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.’


Retirement Advantage has compiled a list of the top 8 pre-conceptions that those approaching retirement have about annuities:




“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.
“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.
“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.
“I’d be better off managing my own money.” People want the security and peace of mind that only a guaranteed income can provide.
“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.
“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.
“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.
“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 woman4.