Are annuities really dead?

Up until the Budget, annuities were the main option for those who wanted to turn their defined contribution pension scheme into a retirement income. And then annuities were taken off the table, or were they?

The greater flexibility announced by George Osborne seemed to sound the death knell for annuities. But have we been too hasty to write off annuities and can they still form a part of our planning?

Annuities in the new world

An annuity guarantees you a retirement income for the rest of your life, but you can’t change your mind once you go down this route and usually your money won’t be passed on to your family should you die ‘early’.

The pension changes have brought other options into play – affordable income drawdown will let you keep your money invested and take it out as you wish, while you can also take the lot as cash subject to your marginal rate of taxation.

Annuities haven’t been helped by the low rates of the last few years and the fact that some people have signed up to poor deals due to the difficulty of shopping around.

Over the past week, however, the appeal of annuities may have been revived…

Annuities back on the agenda

The Government is going to change tax rules to let you vary the amount of income they pay and allow you to take a lump sum from an annuity.

A further change initiated by the Government will also make sure that your pension fund is returned to your family when you die.

Meanwhile, a report from the International Longevity Centre has shown that annuities offer fair value for money and should still play a key role in most people’s retirement planning.

Part of your pension planning

The fact that you have more options now doesn’t necessarily make it easier to decide what to do. The new free guidance should help you to plan, but you’ll still have to decide how you’re going to access your money.

We’ve had some Which? members contact us to say that they’ve gone through with an annuity purchase, despite being able to defer the decision, as it’s still the best option in their opinion.

Are you currently considering your retirement fund? What’s your view of annuities? Would you still opt for an annuity as a way to ensure a regular income for the rest of your days?

william says:

30 July 2014

When the new rules were announced my first thought was oh good, maybe this will force insurance companies etc to offer decent annuity rates.

I’ve known of people getting almost 13-15% returns on their savings during the financial down turn, if individuals can do it , why can’t these massive companies with so called experts working for them manage that sort of return.

malcolm r says:

For some retirees, the option of buying an annuity and guaranteeing an income for life will be attractive – particularly for those with life-shortening conditions. The good thing is there is choice – we can decide for ourselves how best to handle our own money.
william – it is now probably too late to get 13-15% returns post down-turn, but would you share with us how they achieved this? My suspicion would be it was associated with a high degree of risk, and many who tried this could have lost heavily. Massive companies would be very irresponsible in taking on a high-risk strategy unless their investors were quite clear about the consequences. But I am pre-empting your reply!

Kick out funds, the return is now down to around 7-9% but 2 years ago my friend was getting 13%

william, I don’t know what kick out funds are. Could you explain.

I only have a very limited understanding as I don’t have the funds to invest and get locked in them myself

1) You invest a min of £100k a time.
2) The funds will pay out if the FTSE100 has gained x points over the year starting from year 2 onwards, if the FTSE has gone down or doesn’t pay out the money rolls over to the next year, repeat

E&OE

Of course they’re all slightly different, I’ll post an actual example in a reply to this one.

This one is from Investec. you may have to say you’re a financial advisor t see it. I don;t know why they wouldn’t want normal punters to see it.

And FYI even if I had the money I wouldn’t touch them

http://www.investecstructuredproducts.com/advisers/products—downloads/investment-plans/ftse-100-enhanced-kick-out-plan-46.html

william, thanks. I don’t pretend to understand these structured products – perhaps someone from Which? Money could help. You seem to be betting on the FTSE at the end of a period, by lending your money to a bank (If the bank goes bust, you may lose your money). I don’t know whether there is a defined date at which your returns are calculated, but if so this is another risk that the market may have dipped. Dividends are not paid on the shares.
Out of interest, if you had bought a basket of low-medium risk shares and funds in Jan 2010 they would have grown, on average, by around 8.5% a year (simple) after charges. And you would have control over when they were sold if you needed to take a profit. I don’t think that performance is likely to be repeated in the forseeable future.
Like you, I wouldn’t touch them either – I can’t afford the risk.

The annual dates are normally listed, in the example I posted they’re approx 3rd Sept 2016, 2017, 2018 etc So you do have wait and depending on how the market does that could be several years.

My friend has several on the go atm, I thought I’d done well until he got me to start maintaining his spreadsheet for him 🙁

I bought some Sainsbury’s shares, yield just over 5% , last year. A nice “solid” company you’d imagine, now currently showing a 20% loss 🙁

Shares in another company with a yield just over 11%, but I do consider them a huge risk. I’m still annoyed hat I had to bed and breakfast them just to get them into a stocks and shares ISA, what a ripoff.

Richard Riley says:

5 August 2014

William, It is unwise to give financial advice on a bulletin board such as this. In fact I’m surprised that “Which” has not pulled your comments!

A product such as you describe could only be recommended by a qualified IFA after a full fact-find of the individual’s circumstances. Though Investec are a reputable company I’m sure they would be appalled at anyone suggesting they pretend to be a financial advisor to see their literature.

And haven’t you read the section of this week’s email about not clicking on links to scam financial websites!

Richard, I think you’ll find they’re my own limited view and don’t constitute advice. I was simply asked to explain a comment and its rather hard without evidence to back it up. Sorry.

And I know all about Investec thanks, they used to be one of the clients of a company I worked for. That’s why I used their products as an example as opposed to someone else’s. Although several other links shown up on google where also clients.

And I don’t need to read anything about scam sites either, as I’m more than able to spot 99.9% of them with my eyes shut. Thanks for your concern though.

Vynor Hill says:

1 August 2014

I thought “they” took your money in return for an income for life, and the capital was exchanged for a monthly pay out significantly above the usual savings rate. Once the capital changed hands that was the last you saw of it. This last was the reason why I dismissed annuities. I am also puzzled at annuity quotations that fix a rate for five years. Does this mean that your pension can be reduced after this period of time? Does it mean that an annuity payment will vary during its lifetime? Surely, if the government seeks to get companies to pay back capital to families, this will make annuities more expensive to fund and rates will fall accordingly? I’ve always looked upon annuities as poor value for money and, as you say, there’s a finality about the decision. These days, old age gets to be expensive and comfort comes at a cost. The choice of sheltered accommodation is limited by funds available…en suite or bed pan?

AJW says:

2 August 2014

I’ve also been wondering about fixed term annuities, where you get your remaining pot back after say 5 years and can then do what you like with it. It’s a way of ensuring a regular income as well as getting at your 25%, without tying your money up for ever. Apparently there’s a low rate of interest on the capital during the annuity period, but is this a poor bet compared to other things you might do with it? Any advice appreciated. Perhaps Which? could do an article on this?

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