“Annuities protect different risks so you can normally choose an annuity that best matches the needs of a client,” explains Alan Higham, chairman of Annuity Direct.
“Annuities that protect all the risks come at a high price so they can be seen as poor value by the public when compared to deposit accounts for example.”
According to Stephen Lowe, director of external affairs at Just Retirement, annuities can address either of two fundamental risks: longevity risk, and investment risk.
Mr Lowe elaborates that the main advantage of guaranteed annuities is that the income is determined at outset and guaranteed for life, meaning all of the risks are “passed over to the insurance company”.
However, depending on whether the individual qualifies for an enhanced annuity the rate offered may not provide a generous income level over the course of their retirement.
In contrast, he says investment-linked and fixed-term annuities offering greater flexibility, but carry corollary risks. In the case of the former the investments may fall in value and thus provide a poorer income level, and in the case of the latter the amount available at the end of the term may not provide the level of income desired if annuity rates have fallen, for example.
For a guaranteed annuity paid for life, the main difference between different providers will be the rate offered.
Dean Mirfin, group director at Key Retirement Solutions, warns that rates vary from provider to provider by as much as 20 per cent and so it vital that you shop around and the client does not just purchase from their pension provider.
However, notes Mr Higham, there are some important differences in the fine print of the policies that affect death or survivor’s benefits: “Underwritten annuities have differences between qualifying standards between providers e.g what counts as a ‘smoker’.
“With-profit annuities are priced differently but then the future payments depend on future bonus payments, which make them a very hard product to compare and recommend.”
Even the most popular annuities have their downsides, as Mr Mirfin explains:
“The conventional level lifetime annuity is the biggest seller because it pays the highest initial income. The income is guaranteed for life and there is no risk of the money running out.
“But the income does not rise in line with inflation and clients will be receiving the same income after 10 years or even 30 years. It’s the same as not receiving a pay rise for 10 years or 30 years. Inflation even at 2.5 per cent a year can seriously damage your spending power.”
He points out that any clients with a health or lifestyle issue will receive a higher income with an impaired life annuity but that also can run into the same inflation issues.
