Where do annuities stand?

Many have been brutal in their assessments of the market, with even those that believe annuities have a role suggesting that they will be less utilised by most.

Dominic Grinstead, managing director of MetLife UK, says it is likely that most will decide not to put all of their money into one annuity product at one point in time.

There may be some appetite to secure enough income to meet living expenses so Mr Grinstead says it is more likely that if used, an annuity will be used as part of the solution rather than being all of it.

Mike Morrison, head of platform marketing for AJ Bell, says an annuity is the one product that offers a guaranteed income for life and thus still has its place.

As part of a retirement plan now, Mr Morrison says an annuity could be used to secure the absolute minimum income, with a drawdown portfolio supplementing it. Such ‘blended’ solutions are the subject of widespread speculation over likely product innovation.

After the Budget, John Perks, managing director of LV Retirement Solutions, says LV contacted advisers with clients who had selected to purchase an annuity to see whether they still wanted to proceed.

Many of those contacted by LV after the Budget did still go on to purchase an annuity as they felt it was still the right option for them, Mr Perks says.

Whatever the changes to access to retirement income post Budget, Mr Perks says customers still want similar things from their retirement income that will depend on their attitudes to risk.

Mr Perks says LV consumer research found retirees like the idea of jam jar saving with a fund for their “essentials”, another for their “treats” and another for those unexpected costs.

He says: “An annuity or an insurance style product that provides a guaranteed income could, either separately or in conjunction with another solution, help retirees to fund their day to day essentials and perhaps also lock in an element of more discretionary spend.”

What the specialist annuity firms say

While people will have much more flexibility from April 2015, Andrew Tully, pensions technical director of annuity provider MGM Advantage says many people will want at least some level of secure income for life, effectively as a hedge against living too long.

Mr Tully says: “An overwhelming need for many retirees is that they still don’t want to run out of money or suffer a dramatic fall in their standard of living.

“An annuity helps with this risk, allowing people to draw the highest level of sustainable income. Annuities, and especially the better value provided by underwritten annuities, will continue to play a part for many people – for some or all of their pot.”

MGM has confirmed it will be looking to evolve its product range, protential including a blended product solution combining an annuity and a drawdown-style element.

As people age, Stephen Lowe, group external affairs and customer insight director at enhanced annuity specialist Just Retirement, says to match an annuity income requires taking bigger and bigger investment risks just as attitude and capacity to rake risk are falling.

He therefore claims annuities will remain a bedrock of financial planning in retirement for topping up the state pension to provide people with a guaranteed level of secure income.

Mr Lowe says: “Annuitants have the peace of mind of knowing they can spend (or give away) the income they receive this month because they know for sure it will be replaced next month.

“But retirees must shop around to buy the most suitable and not rely on the one offered by their own pension provider – the difference can be worth many thousands of pounds over the duration of a person’s later life.”

The annuity, if still called that, will provide those with a low attitude to investment risk with a guaranteed income for life, says Richard Williams, director of The Annuity Bureau from JLT.

Mr Williams says the annuity will also form part of the overall answer for many covering set monthly outgoings with the balance being invested potentially for more flexibility and better death benefits.

He says such a solution will help against the three risks of longevity, investment and inflation.

As an insurance product against living too long, Mr Morrison says the key might be the age at which an annuity is purchased: why would you buy at a young age when longevity is increasing?