How can clients use annuities and equity release for retirement?

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?

Annuities 

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. 

Mr Garg says: “If you are over 55, equity release is one of the most common products to use today as they allow users to access some of the money tied up in the value of their home without having to go through the hassle and costs of moving.”

It is tax-free and can be done via a loan or selling part of it to secure a steady stream of income and can help towards making any outstanding payments. 

Mr Chan says the most common equity release product is the lifetime mortgage, which rolls up the interest payments.

He adds: “The risk is higher for those who live longer than expected and/or those who took out a lifetime mortgage when they were relatively young."

Mr Garg warns that equity release products can often mean a family is left with a little before death. 

“High interest bills, could exceed the value of your home if not paid off and could leave your family with little left after death. In addition, you will also not be allowed to take out the sum all in one go and if you are in good health, you may find yourself restricted to a release of 35 per cent,” he adds. 

So should clients opt for an annuity, equity release or both to fund their late life needs? 

Mr Garg points out that equity release products can also impact pension and universal credit benefits because the lump sum is tax free. 

He adds:  “This could be a huge loss and outweigh the factors of taking out an equity on your property in the long-term.”

Martin Jarvis, associate consultant at Mattioli Woods, says: “Annuities guarantee an income for life which may suit certain clients, although in this low rate environment the amount may be insufficient to meet their needs.”

He adds: “There is an argument therefore that if a client has a longer term investment timeframe it may mean drawdown and investment risk may be more palatable than the annuity rates on offer.”

saloni.sardana@ft.com