How can clients use annuities and equity release for retirement?

This article is part of
Guide to boosting retirement income

How can clients use annuities and equity release for retirement?

Gone are the days when buying an annuity appeared like the best way to maximise retirement portfolios. 

In recent years, a raft of innovation in the sector has given rise to other products such as lifetime mortgages, to name a few. 

So is there any value left in purchasing annuities, or is it less worthwhile than purchasing equity release products?

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Fiona Tait, technical director at Intelligent Pensions, notes annuities offer considerable benefit to people who like to know how much they are going to receive each month and want reassurance that this will continue for life. 

She explains that annuities suit older people as the need for certainty tends to increase with age as it is mostly at this stage that declining health may start to impact on lifestyle. 

She adds: “As a result, spending may become more predictable and annuity rates may also improve as a result of individual underwriting.

“For this reason, we often suggest to clients it’s not whether to buy an annuity but when to buy one.”

Ricky Chan, chartered financial planner at IFS Wealth and Pensions says: "Annuities are important secure incomes for clients who value certainty of income regardless of how long they live and enables them to benefit from the mortality cross-subsidy."

Mr Chan describes the mortality cross-subsidy as the annuities of deceased investors subsidising annuitants that live longer. 

But he notes that heirs of individuals who die may receive nothing if the annuitant dies outside the guaranteed period of the policy. 

Mr Chan says: “The main drawback of annuities are that retirees lose access to their capital in return for an income for life and their heirs may not receive anything if the annuitant dies outside of the guaranteed period or if no value protection is purchased at outset.”

But as the shape of annuities are “set in stone”, an annuity provider would not be able to increase the annuity already in payment should a holder require changes say due to health, he explains. 

Udit Garg, head of wealth management at Sun Global Investments says there are three types of annuities: fixed, variable and indexed, with various pros and cons. 

He says: “The main benefit of using annuities is that they can provide regular payments and provide that much needed support if someone feels they have not necessarily saved enough.”

Mr Garg highlights annuities are exempt of tax until the holder starts receiving the payment. 

“For older clients, they also offer a death benefit in which a considerable pay-out will likely be made by the insurance company regardless of the annuity’s investments perform,” he adds.

Equity release 

Equity release products, meanwhile, play a slightly different role. They then enable people (usually retirees) to access equity/capital that is locked up in their properties. 

This could be useful to help them with making adaptions to their homes, and/or to continue funding their retirement lifestyle, if they have exhausted their illiquid assets.