Rates on annuities have bounced back strongly since the referendum. So are they a viable option for your retirement income, or are they simply destined to disappear for good?
The big losers from the pension freedom plans, announced by George Osborne when he was Chancellor of the Exchequer (remember that?), were annuities.
An annuity basically allows you to turn your pension pot into an income for life (learn more about them here), but they had been heavily criticised in the years leading up to the launch of the freedoms as offering poor value for money.
By giving pensioners greater freedom over exactly how their money is managed, and removing the requirement to purchase an annuity, annuities had been dealt a severe blow.
This was then added to by the Brexit vote, which caused the rates on offer from these products to crash to new lows.
However, the fortunes for annuities may be on the rise once again.
Data analysis from Hargreaves Lansdown has highlighted that while annuity rates tumbled to record lows on 15th September 2016, following that vote, they have since risen 19%.
Let’s take the example of a 65-year-old with a £100,000 pension pot, who wants to purchase a single life, non-increasing annuity.
Before the Brexit referendum, that pot could have been turned into an annuity that paid out £5,155, though that figure had plunged to £4,495 by September 2016.
Yet today that pot could purchase an annuity paying £5,341.
It’s a similar story across different ages too. With the uncertainty of Brexit looming on the horizon, the certainty – and better return – offered by annuities may be starting to catch the eye of retirees.
A lack of competition
One particularly interesting development since the Brexit vote has been the mass evacuation from the market of annuity providers.
Indeed, there are now just six providers active in the sector, a fraction of what we saw in previous years.
Ordinarily, a lack of competitors would be seen as a concern, as this could mean buyers end up with a poorer range of choice.
Yet the opposite seems to be happening with annuities, with the competition between those firms that have stuck it out evidently strong enough that rates are being pushed up again.
Protecting against an empty pot
It’s not just the improving rates on offer that should have more retirees looking seriously at annuities again.
There’s also the fact that annuities offer real protection against the danger of emptying your pension pot long before you die.
Recent research by the Pensions Policy Institute found that more than a quarter of retirees are at risk of outliving their pension pots.
The growing popularity of the pension freedoms and keeping your pot invested means that we no have far more responsibility in working out how much of our pension to withdraw and when.
And by getting those decisions wrong, there is a real risk that in the final years of our retirement, we don’t have a penny to call our own.
The dangers here aren’t just down to us getting a bit too eager with the withdrawals.
There is also market volatility to consider. A study by Zurich earlier this year found that around 41% of people in drawdown are taking out the same amount from their pension, regardless of how the stock market is performing.
What’s more, a third of those using drawdown have no hands-on investment experience, while 41% have not received any financial advice or guidance.
Therefore, there's a real risk that by failing to adjust as the market moves, carrying on regardless with your withdrawal habits, you end up wiping out that hard-earned pension pot long before you pass away.
Do savers care?
Of course, this only matters if savers are actually open to considering including an annuity as at least part of their retirement plan.
A study by Hargreaves Lansdown at the tail end of last year found that, while only 12% of retirees currently opt to purchase an annuity, as many as 43% of those approaching retirement envisage doing so.
The firm reckons that while demand for annuities is likely to remain subdued for the next few years, it could double in size by the mid-2020s as the ageing baby boomers move into retirement.
Only time will tell, but if we don’t have at least a decent level of demand before then there is a risk that the number of providers offering annuities will plummet once more.
A retirement income plan doesn’t have to start and end with annuities, but they will continue to play a role for many of us when the time comes, faults and all.
Read more about your options in this guide to drawing an income once in retirement.
Would you take out an annuity at today's rates? Are they now redundant given the pension freedoms? Share your thoughts in the comments section below.
Be the first to comment
Do you want to comment on this article? You need to be signed in for this feature