Lifetime annuities offer fair value for money while protection against longevity risk may be poorly understood by consumers, Jonquil Lowe has said.
The author of a new report by the Open University Business School and finance lecturer said: “This much-maligned financial product should ideally still play a key role in most people’s retirement planning and in the free, impartial guidance for every retiree.”
The 18-page report Wither UK Annuities? published by the International Longevity Centre with the Open University’s True Potential Centre for the Public Understanding of Finance, said that annuities are perceived as a bad investment but suggested that consumers shop around for best rate annuities. Falls in annuity rates over the past 25 years has meant that a person who wanted to start retirement with a nominal income of £10,000 would have needed a pension pot of £65,000 in 1990 but over £175,000 by 2013.
While the research reveals that some customers are getting more value for money, and that even the worse annuity rates deliver value for money for women – with the exception of those with a standard life expectancy aged 75.
However the worse annuity rates offer poor value for men, with the exception of men with a higher than average life expectancy aged 55 or 60.
David Sinclair, director of the International Longevity Centre, said: “Given the gap between the best and worst annuities in terms of value for money, it is vital that we continue to encourage and support pensioners to shop around in order to get the best value annuities.”
Mr Lowe argued that annuities should be viewed through a consumption frame – focusing on what can be spent throughout the remaining life course,
He suggested: “If advisers and individuals are using an investment frame, the focus will be on rate of return and investment risk, but not longevity risk.”
ADVISER VIEW
Billy Burrows, associate director at Preston-based Key Retirement Solutions, said: “The choice for all at retirement will be ‘Do I want to carry the longevity risk myself, or do I want to share or even eradicate the risk with an insurer?
“The research rightly points out that annuities provide a valuable insurance that consumers will not live too long and outlive their pension savings and that there is no other financial product that provides a guaranteed lifetime income. The grass may look greener with the new freedom but a lack of focus on life expectancy and living too long means that there is a real risk that many may run out of money in the future.”
