Retirement Advantage has suggested the availability of longer guarantees of up to 30 years have replaced joint-life annuities.
Andrew Tully, pensions technical director at Retirement Advantage, stated these longer guarantees effectively change the conversation around annuities.
“You can protect yourself, your family and be assured that whatever happens, the insurance company won’t be keeping your money.
“More than half of our retirement account sales now include guarantee periods longer than 10 years or 100 per cent value protection, which is quite a shift in behaviour.”
The provider created a case study of 65 year-old Mark, who is looking for a lifetime income to illustrate the point. Mark wants to ensure 60 year-old Susan is looked after when he dies.
Mark has a pension fund worth £55,600 to buy an annuity (net purchase price after he takes his 25 per cent tax-free cash). His options are:
Basis | Annual income | Guaranteed income |
No guarantees | £2,898 | |
50% dependant’s income | £2,668 | |
100% value protection | £2,598 | £55,600 (balance paid as a lump sum) |
5-year income guarantee | £2,889 | £14,445 |
10-year income guarantee | £2,856 | £28,560 |
15-year income guarantee | £2,793 | £41,895 |
20-year income guarantee | £2,702 | £54,040 |
25-year income guarantee | £2,594 | £64,850 |
30-year income guarantee | £2,491 | £74,730 |
If Mark chose a 30-year guaranteed annuity, then the income paid would be at least £74,730 - or the return of Mark’s original capital and a further third over the course of the annuity guarantee period.
If Mark dies early, the guarantee will ensure the income continues to be paid to Susan for the remainder of any guarantee term (or commuted to a lump sum).
Unlike a joint-life annuity, if Susan pre-deceases Mark, the income will still continue to be paid (or commuted to a lump sum) to a nominated beneficiary or beneficiaries.
Adviser View
Andrew Whiteley, a financial adviser with Hertfordshire-based Provisio Wealth Management, said: “So effectively Retirement Advantage only need to achieve 2 per cent per annum net growth on Mark’s capital to ensure that they can guarantee his income for 30 years.
“If I were Mark I would take my chances with drawdown.”
ruth.gillbe@ft.com
