How do annuities continue to meet retirement income needs?

The clue is to be found in annuities’ other name – guaranteed income for life products.

Perhaps now more than ever the certainty annuities bring appeals to those whose future is very uncertain, whether that’s because of age and health, or the political and economic events taking place around the world today.

“Retirees or future retirees face uncertainty from every angle,” says Natanje Holt, retirement expert at Bravura Solutions.

“Today you have to navigate possible outcomes from a host of different scenarios in the midst of Brexit and the rise of populism, the uncertainty of life expectancy, your expected health in 10, 20, or even 40 years’ time.”

She continues: “That is before looking at possible changes in inflation, the stockmarket performance and the inevitable tinkering from the government. Most humans don’t like uncertainty and the ability to cope well with change reduces as we get older, and it creates more anxiety.”

Data from the Office for National Statistics shows the number of Britons living to the age of 100 has quadrupled in the past 30 years.

As Andrew Pennie recalls: “Henry Allingham died in 2009 aged 113, having received 48 years of payments from an annuity and more recently Gladys Hooper also reached 113 having benefitted from an annuity for 53 years.”

This could soon become the norm for many people, although facing up to that is not always easy.

Gimme gimme gimme

The Iress Retirement Report, published in January this year, observes: “Annuities may no longer be the default option at retirement but continuing steady demand shows that they still have a real role to play.”

The report refers to research carried out by Defaqto and Partnership in February 2016 which found 62 per cent scored a guaranteed income for life as the most important feature of a retirement income product, compared to 64 per cent in April 2014.

Many people do not want their income to fluctuate based on investment returns and others have a low capacity for loss and need a guarantee.Mike Morrison

As Mike Morrison, pension expert at AJ Bell points out: “Annuities are not investment products but they are life assurance products, providing a guaranteed income for life. If you ask people what they want from a pension that is still their answer.

“Many people do not want their income to fluctuate based on investment returns and others have a low capacity for loss and need a guarantee.”

“However long the individual lives there will be a guaranteed income and there will be no need to manage a portfolio in old age,” he adds.

The knowledge they will receive an income every year in retirement following the purchase of an annuity is enough security for many retirees.

Time to change

Fiona Tait points out a conventional annuity is the most cost-effective way of providing a guaranteed level of income in retirement, which is something that many people, particularly those who have been used to a regular salary up until retirement, will value.

But she admits there are some flaws with these types of income for life products, which require people to make a decision at the start of their retirement about what they may or may not need later on in their life.

“The most popular age for annuity purchase is still age 65, which means some annuitants could expect to spend 30 years or more in retirement, during which period their income needs are likely to change considerably,” Ms Tait says.

Jinesh Patel, vice-president of investment consulting at Redington, agrees there are drawbacks to annuities now that people are living for longer.

“First of all, they are inflexible and tend to take a rather crude one-size-fits-all approach,” he explains. 

“This wouldn’t suit those looking to phase their retirement, for example by slowly reducing number of days worked.”

He adds: “Similarly, it doesn’t take into account the different stages of retirement – those who are newly retired are likely to be more active, and possibly even have dependents and will therefore have greater need of income, while older ones might be able to manage on a lower income. 

“It also fails to recognise potential social care costs, which may become a factor in late-stage retirement.”

The hybrid approach also allows much more flexibility over the payment of death benefits, allowing you to help your customers to control the tax paid and cascade benefits tax-efficiently to their family after they die.Andrew Tully

Ms Tait believes this will mean annuity providers – those that are left in the market – will have to keep up with the changing needs of retirees at various stages of their retirement. 

“We are therefore likely to see continued product developments which allow annuities to be more flexible and tailored towards particular consumer groups, although it is important to realise that these options are likely to come at an increased cost,” she suggests.

There have been some changes in how people use annuities which helps get around this problem, with many opting for a ‘blend’ of income drawdown and an annuity, or simply taking out an annuity later in life, at around the age of 80, for example.

So guaranteed income for life products also work well in conjunction with other retirement income provision options, adding yet another string to their bow.

“The new hybrid solutions which hold an annuity within a drawdown wrapper get around that problem,” explains Intelligent Pensions’ head of pathways Andrew Tully. 

“The customer can choose each month how much of their income to withdraw and how much to leave to build up in the drawdown pot for use at a later date. Or, in other words, a fully flexible annuity income which allows you to help your clients with tax planning and to vary income to meet their changing needs.

“The hybrid approach also allows much more flexibility over the payment of death benefits, allowing you to help your customers to control the tax paid and cascade benefits tax-efficiently to their family after they die.”

Mr Tully insists there will be a future for annuities because they meet so precisely many people’s needs when they come to retire.

eleanor.duncan@ft.com