New My Pension Expert research reveals that annuities will still have an important role to play for many people in retirement despite the Budget announcements.
Following the Budget announcements in March, George Osborne declared that “No-one will have to buy an annuity”. This was met with widespread approval as annuities were already commonly disliked because the level of income they produce had been deemed as a poor return. So are annuities a bad investment and are they still worth considering given the raft of reforms put in place?
A study from Just Retirement has found that a 65 year-old male annuitant is expected to live on average 23 years, to age 88 and a 65 year-old female 25 years to the age of 90. My Pension Expert applied this information to a 65 year-old male and female with pension pots of £100,000, in order to investigate the value for money that annuities provide.
Currently the top standard annuity rate for a pension pot of that size is £5,934. That would mean that it would take 16.85 years to breakeven on the £100,000 investment. Therefore if the male lived to the age of 88 he would see a 36.482% profit on his initial investment and if the female reached 90 then she would have received a 48.350% profit. Similarly 25% of 65 year-old males are expected to live beyond the age of 94, once they have reached that point they will have received a 72.086% profit on their pension pot.
What this evidence shows is that while there is an aura of negativity surrounding annuities because of their falling rates, the increases in life expectancy have to some degree countered this, meaning that they are still a profitable option for many. As an annuity is the one product that offers a guaranteed income for life they also provide the annuitant with the peace of mind that their financial future is secure.
The recent news of the abolition of the 55% pensions death tax will mean that those with value protected annuities will be able to leave what remains of their pension pot to a beneficiary. If they die before the age of 75 then it will be tax free, whereas over 75 it will be taxed at a marginal rate. This is good news as the main downside to a lifetime annuity was the fact that once the annuitant died then their pension pot died with them, unless they had opted for spousal protection at a premium. So now someone who is risk averse that wants a guaranteed income stream can also have the reassurance of a lump sum death benefit if they die before getting the value from their annuity.
Scott Mullen, director at My Pension Expert said;
“The key to making the right choices at retirement remains advice. What these findings show is that despite all the negative coverage annuities have had recently, there is still clearly a role for them to play going forward.
“That’s not to say that they’re the right option for everyone but certainly for some the potential gains that can be made would suit their needs perfectly. The most important thing to ascertain is what those needs are, that way a policy can be built around them.
“An advisor can establish what the best possible retirement route is for an individual and direct them accordingly. That could be the security that an annuity provides, the flexibility that a drawdown product can offer or one of the many other options that are now viable following the Budget.
“Whatever the product, a financial adviser can search the whole of the retirement market to make sure that the best possible financial deal is chosen.”
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