The role of annuities in modern retirement planning

The value that annuities offer has been somewhat overshadowed by the drop in annuity rates and the focus on flexible income drawdown. In the past 10 years annuity rates have fallen by about 50 per cent, in line with a drop in long-term interest rates and improving life expectancy. 

However, gilt yields have been slowly increasing since 2016, which together with potentially higher interest rates could boost annuity rates in the future.

If economic uncertainty and stockmarket volatility persist, we could see people flocking to the guaranteed income that annuities offer, as returns become more attractive. 

It could also be argued that annuities offer more inherent value today than in the past, despite the drop in rates.

Many people are receiving annuity income for far longer than their parents’ and grandparents’ generations, because of the significant increase in life expectancy. 

In 1950, male life expectancy was just 82.5 years, compared with 93.6 years in 2016. Meanwhile, female life expectancy has risen from 77.9 to 90.8 years over this same period, according to the Office for National Statistics.

Another often overlooked feature of annuities is they do offer flexibility, albeit not to the same extent as income drawdown.

This increase in life expectancy means of those who took out an annuity with Legal & General 20 years ago, nearly 77 per cent are still receiving an income today.

Modern annuities can also provide valuable death benefits. Guaranteed minimum payment options can ensure that if the policyholder dies during their chosen payment period, income will continue to be paid to their estate until the end of the period.

An annuity can also pay an income to the policyholder’s surviving spouse or civil partner, if the policyholder dies first.

Both options help people to leave something behind for their loved ones when they die.

Another often overlooked feature of annuities is they do offer flexibility, albeit not to the same extent as income drawdown.

Income can be tailored to the client’s needs at the outset through a fixed income for life; increasing income by a specified percentage each year, or rising in line with the Retail Price Index (RPI) as an inflation-proofing option.

Fixed-term annuities can also be used as a way to provide a guaranteed income for a defined period of time, enabling the customer to reassess their options later in retirement but without leaving them exposed to investment risk.

Moreover, clients who have certain health or lifestyle conditions, such as cancer, high blood pressure or being overweight, may be entitled to receive a higher income. This is because their condition may affect their life expectancy.

Annuities for the modern retiree

Modern retirement planning needs to reflect the changing needs of today’s retirees.