As annuity rates have been low for some time, are pension annuities as bad as some non-UK advice firms suggest?
We regularly see the reasons for recommending a transfer from a final salary scheme as being ‘’No need to buy an annuity” and “flexibility”, with no explanation of the supposed benefits or downsides to pension annuities.
Headlines like this have been used to convince people that pension annuities are not the way to go in retirement.
What are Pension Annuities?
Pension annuities are insurance contracts that insure against you living too long. In return for a lump sum (the money in your pension fund), an annuity provider (insurance company) will give you an annual income for the rest of your life.
This is fine for those that live a long time, but not so good if retirement is cut short and there is a family that may have inherited a large sum that has “died with the annuity”
Pension Annuities- Life Expectancy
We don’t know how long we will live for and the case for not buying pension annuities is often given as “providing for your loved ones when you die” by some websites, rather nauseatingly in my opinion. While soft facts are important in client recommendations, scaremongering and purely emotional decisions arrived at without considering the facts could prove costly.
Does not buying pension annuities really “Provide for your loved ones’’? Well, many that thought that it would will find out that it won’t- possibly while they still have many years of retirement left.
Sustainability of Income
The reason there may be no money for the ‘’loved ones’’ is that uncontrolled withdrawals from a pension, poor investment performance and/or excessive commissions and fees will drain the fund for many. This will leave many reliant on their ‘loved ones’, a far cry from leaving an inheritance. In other words, poverty in later retirement when the initial outlook was rosy.
Remember, the DB scheme (as would an annuity) provides a guaranteed income for retirement until death (DB schemes do, and pension annuities can, allow for a spouses’ pension) that would have some protection against inflation.
Clients need help setting up a plan that will be constantly reviewed for their whole retirement, and 100 is the new 80. Advisers need to be on top of their game to ensure the income that is taken is sustainable. The use of insurance bonds and high commissions is not compatible with sustainability.
Later Life
Age and health will affect the rates payable by pension annuities and just because an annuity is not purchased at retirement does not mean that annuities should not be considered later for part or all of the pension fund.
This provides certainty in old age and may actually protect the non-annuitized fund for the family.
Summary
There may be many reasons why someone approaching retirement does not want to lock into an annuity, and the giving up of guarantees should not be a decision taken lightly if moving from a final salary scheme.
There is enough empirical evidence out in the expat adviser market to show people’s funds are being eroded by poor management, high commissions and unregulated investments. This will result in many being reliant on state handouts and family support.
An experienced financial planner adviser will explain annuities as part of the planning process and, may come back to them in later life if appropriate, if not purchased at the point of retirement.
Always ask for evidence on the adviser’s investment licenses and ask about the experience and track record of those providing the investment advice. Ideally, evidence of how the firm has managed client funds and how it performed AFTER all expenses and fees were deducted.
A final thought, for those that are considering transferring a final salary scheme and are mindful of what the family would receive on their death, a whole of life policy (Joint life second death for example) may be a consideration for those in good health. For those in poorer health, annuity rates may look quite attractive after all.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published on 22nd January 2018
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