There has recently been a devastating blow to new retirees looking to secure a stable retirement income for life, as annuity rates fall to record lows. Is there still a place for annuities following the introduction of this year’s pension reforms?
Recent reports show a major decline in annuity rates, with an almost 30 per cent decline since 2008. Even since the start of this year, 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.
This news comes just a few weeks after the radical pension reforms – announced in the 2014 Budget speech allowing unrestricted access to pension funds – came into force, meaning retirees are now no longer pushed into the purchase of an annuity if they don’t feel it is the correct retirement option for them.
Despite the declines – blamed on a combination of poorly performing yields linked to government bonds, as well as a decline in annuity sales in general – there are many arguing that the reforms are actually going to welcome in a new era for annuities.
In the report, Burrows argues that due to the security and peace of mind the annuity offers to a retiree – using their pension fund to provide them with a secured, regular income either for life, or over a fixed period – there is still a vast majority of people for whom it will remain their recommended retirement income route.
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”.
Despite the decline in sales recently reported, it’s clear that there is still a vital place for annuities when choosing a valid retirement income route.
While income drawdown allows unrivalled access to your pension funds, giving you the option to manage your own income and make bigger or smaller withdrawals as you see fit, and routes such as trivial commutation allow you to withdraw the whole of a small pension fund, neither of these options will provide you with stability and security on your income; something which the annuity products are still unrivalled at.
It’s also worth remembering that the new pension freedoms allow an element of ‘mix and match’ to enter your 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.
There are clearly still many retirees who see the value in securing a retirement income for life, with over 400,000 annuities, worth around £12 billion sold every year.