Amid all the options available at retirement, why is it that annuities continue to meet the needs of so many people?
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.
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.