Ten years on from the pension freedoms that sparked a shift away from annuities, interest and understanding of the role they can play is once again improving. New research from Standard Life, part of Phoenix Group, set out to understand the levels of understanding with over 50s and highlighted a number of stark trends.1
When asked which retirement income products provide a guaranteed income for life, half (49%) of over 50’s correctly identified lifetime annuities – increasing from 39% of over 50’s in 20232. This represents a significant 25% improvement over the last year and echoes the latest ABI data which revealed annuity sales increased by 34% in the last year3 reaching a post-pension freedoms high.
When considering what to do with their pension pots, almost everyone said (95%) that income certainty and security are important to them.
Despite this clear customer need, knowledge gaps and common misconceptions around annuities still remain, with almost half (48%) of over-50’s saying they are unfamiliar with what lifetime annuities are and how they compare to other annuity products. When asked a series of true/false statements about annuities and how they work, 53% responded with ‘don’t know’, while only 30% of over 50’s correctly identified that an annuity can be set up to cover the life of a surviving partner. Similarly, just 30% are aware that an annuity can be purchased whilst remaining in drawdown.
Top annuity misconceptions dispelled:
1. An annuity allows you to pass your savings onto to loved ones - Just 30% of over 50’s (37% in 2023) identify that annuities can be set up to cover the life of a surviving partner. Annuities come with various benefit features designed to help ensure your loved ones are covered should anything happen. Value protection provides a death benefit to a customer, ensuring their investment is returned to their beneficiary (less any income taken), while purchasing a guaranteed period for up to 30 years secures a regular income for a customer’s beneficiaries or dependents in the event of death.
2. Annuities don’t have to be used on their own – Annuities can help shape the retirement you want, providing a regular, guaranteed income, but they can also be used alongside other retirement income products. The best approach can often be to combine different income solutions, providing both certainty and flexibility. Only 30% of over 50’s know that this is the case.
3. An annuity doesn’t have to be bought at the point of retirement – Only 31% of people know that an annuity can be bought at any point in their retirement, with various amounts of money. The reality is that you can purchase an annuity later in retirement, which also means you benefit from annuity rates improving with age.
4. Annuities can provide protection against the impact of inflation - It is possible for annuities to protect against the impact of inflation if this option is purchased at point of sale. An individual can choose whether to increase their income by a fixed percentage or in line with the Retail Price Index on an annual basis. Purchasing annuities in stages can also help mitigate the impact of inflation as rates increase the older you are.
5. Having underlying medical or health conditions doesn’t mean you get worse rates - While it is often assumed that having a health condition makes insurance products more expensive, enhanced annuities can often provide a more generous income to those suffering from health conditions or shorter life expectancy. Only 18% are aware that they will get a better annuity rate if they are suffering from a health condition.
Pete Cowell, Head of Annuities at Standard Life, said: “It’s really encouraging to see a significant increase in awareness around the role a guaranteed income can play in retirement. Most people say they want some form of certainty with their retirement income, and annuities do just that. This increasing awareness is clear to see in the recent ABI annuity sales data, reflecting rising demand among retirees and a shift in how financial advisers are considering these types of products alongside other retirement income solutions. That said, common misconceptions still exist around what annuities are and aren’t. The reality is that there are many ways annuities can be used as part of the retirement income toolkit. Lifetime annuities, for example, offer the security of an income for life, while fixed term annuities provide certainty for a set period, allowing retirees to reassess their options later. Purchasing annuities in stages can also help mitigate the impact of inflation and market fluctuations. It’s important to understand the different annuity products available and the ways they can be used, which will ultimately help ensure people opt for the solutions that best meet their specific retirement needs. This is where advisers play a crucial role, as well as sources such as Money Helper which provide valuable information for those looking to stay informed.”
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