Annuities have become a controversial topic within the retirement finance sector. Less than a decade ago, they were a staple in most consumers’ retirement strategies. Today, they usually overlooked in favour of alternative retirement finance products.
However, are consumers too quick to dismiss annuities?
What are annuities?
Annuities are financial products, which consumers can purchase with part or all of their pension pot.
They come in two main forms. Firstly, there are lifetime annuities, which guarantees retirees an income for the rest or their lives. Alternatively, consumers can purchase a fixed term annuity, which provides consumers with monthly income for a fixed period of time; usually between 5 and 10 years.
Prior to pension freedoms being introduced in 2015, the majority of consumers would withdraw 25% of their pension pot as a tax-free lump sum and use the additional 75% to purchase an annuity.
However, with consumers now able to access their pension pot once they reach the age of 55, they have greater autonomy over their retirement strategy. Today, consumers can choose to withdraw all of their pot in one go; or they can consider alternative options, such as drawdowns or investments offering higher returns.
Consequently, the financial services industry has seen a rapid decline in annuity purchases. Indeed, before the pension freedoms, annuity sales ran at approximately 350,000 a year; in 2018, just 33,975 new annuity sales were recorded.
However, whilst the pension freedoms explain why consumers are increasingly curious about alternative retirement options, other factors have also influenced consumer opinions about annuities.
Potentially poor value
Many consumers worry that annuities are “poor value”, assuming their money could be put to better use elsewhere. This assumption stems from the fact that annuity rates have decreased in recent years.
Put simply, annuity rates determine the amount of regular income a retiree will receive in return for their pension savings. Most annuity providers take into account numerous factors when calculating this, including the health of a retiree and how much they have saved into their pension pot. In short, annuities are a financial hedge against living too long. However, the plummeting of annuity rates can largely be attributed to a longer average life expectancy and record low interest rates of 0.1%.
Given that most annuities offer fixed rates – so retirees are unlikely to benefit from a rise in annuity rates – it is perhaps unsurprising that more consumers seek to secure a more flexible retirement income option, which offers better returns on the pension.
Forceful sales techniques
This combination of low annuity rates and greater freedom to dictate one’s retirement finances has led to falling annuity sales.
The industry has sought to remedy this, by investing in marketing and sales campaigns to spark greater consumer interest in the product. However, some providers have adopted slightly more forceful tactics.
Earlier this year, The Times revealed that some providers were paying sales representatives astonishingly high commissions to sell annuities. Whilst this figure is always disclosed to the client just before the product is purchased, it does suggest that many representatives will be motivated to receive the large commission, rather than ensuring the financial well-being of their client.
Additionally, sales representatives lack the in-depth understanding of annuities themselves, and the retirement finance market in general. They also lack the ability to analytically consider a client’s financial situation and help them decide the best retirement option for them. Thus, consumers may feel pushed into buying a product which does not suit their needs.
Deserving of recognition
Overall, annuities do deserve to be considered when planning for retirement.
Annuities are the only retirement income products that provide retirees with guaranteed income for life. In my view, it de-risks their income, ensures that they will not be left out of pocket and most importantly ensures they do not run out of money. In such volatile economic times, this can certainly offer a great deal of comfort to retirees.
However, the financial services industry must reconsider its approach to annuities. Rather than pushy sales tactics, providers must provide consumers with impartial, jargon-free information about annuities to help consumers understand more about the product itself.
Further, the industry must ensure independent financial advice is accessible to all consumers. After all, annuities may not be right for everyone, so consulting an expert will ensure that they are choosing the product that best suits their needs.