Financial experts claim the annuities are unpopular with retirement savers because few understand how they work and myths abound about them.
Annuities are contracts bought with pension funds that are guaranteed to pay a monthly income for life.
Many financial experts claim they offer poor returns and argue that falling rates over recent months make them a poor buy.
Annuity adviser Retirement Advantage claims the arguments are unfair and that annuities receive an undeserved bad press.
Annuity myths and preconceptions
To better explain annuities, the firm’s pensions technical director Andrew Tully has come up with responses to eight myths about the financial products:
- Poor value – customers can get a better deal by shopping around and comparing rates, but only a third of retirement savers do so
- Providers keep the cash if I die – many providers offer annuities that come with 30 year guarantees of 100% value protection that gives families their money back
- Savers cannot leave cash in an annuity to their loved ones – The annuity investment less payments made can be paid to beneficiaries with no tax if the retirement saver is under 75 years old
- Managing my own money gives a better return – A guaranteed annuity offers certainty
- Flexible access gives a better return – Not always as drawdown is linked to rises and falls in the stock market
- Annuities are a one-off buy – Not always. Customers can phase purchases
- Annuities lick retirement savers in to a contract – New annuities offer guaranteed income and flexibility to redirect investments
- I won’t live long enough to benefit from an annuity – Statistically most people will. Men live to an average of 86 and women to 89. Men have a 25% chance of reaching 94 and women have the same chance of reaching 96.
Fears are unfounded
“Annuities have had a makeover since the government introduced flexible drawdown,” said Tully.
“An annuity is the only way to gain a guaranteed income in retirement and many people do not realise that their fears about poor returns are unfounded.”
Tully also explained that the only way to be sure retirement savers had explored whether an annuity is right for them is to talk to an IFA.
“It’s vital everyone gets the best advice they gain to maximise their income during retirement,” he said. Annuities may not be right for everyone, but they won’t know until they have checked out the market.”
