The Great Return after the Great Retirement: choosing an annuity is back
www.paulcochrane.co.uk
Written by Steve Butler, CEO, Punter Southall Aspire
Believe it or not, pensions used to be a much more simple business.
In the not-so-distant past, as you approached retirement, you were handed a pot of money which was your pension but you weren’t allowed to spend it. Instead, you had to hand it over to an insurance company in exchange for a guaranteed income every year, called an annuity.
Broadly speaking, until the pension freedoms of 2015, this was the main road to go down for most of us to convert what we had saved into what we could spend after we stopped working. But the Budget in 2015 changed all that. No longer were most of us compelled into this irreversible transaction, one which had gradually been overshadowed by talk of providers promoting only their own products without opening the curtain on what else was on offer in the rest of the market. Coupled with dawdling interest rates, what was on offer looked less than appealing.
So, the mantra goes, George Osborne did us all a favour by opening out the choices available to everyone on the cusp of their autumn years. Drawdown, hybrid, transfer and Uncle Tom Cobley and all meant what had been a fairly simple decision became anything but.
Which brings us right back to annuities. That’s because the story many thought was drawing to a close seven years ago, has a sequel.
The Pensions Policy Institute finds the volume of people using their pensions to buy an annuity has risen to ten per cent of the market in retirement incomes after declining since the introduction of pension freedoms.
A PPI briefing note published in May showed that the average pot size used for purchasing an annuity has risen to £71,000 from £37,000 in 2015. And more pots under £10,000 have been used to buy these products. These accounted for 16 per cent of total annuity purchases in 2016-17, whereas in 2020-21 they were used to buy almost a quarter. And the note also points out that more people are waiting even longer before buying an annuity, as the older you are, the better the rate (because you won’t be around for as long).
The PPI is to publish a report in the autumn focusing on the optimum time to buy an annuity, which should make for interesting reading.
I said it was simple but when should that “optimum time” be? What age is the best age? What kind of annuities are there? What impact do interest rates have on annuities? What are the steps to actually buying an annuity? In the same note, the PPI calls for more data to make buying an annuity more straightforward for everyone.
We have been working on our own project to do just that. Pension Potential is a marriage of comparison website and fact-finder on annuities which, importantly, covers the entire market, giving everyone a complete view of what’s on offer. It’s something we’ll be able to tell you more about as we move further forward in an era when the misconceptions around annuities are, perhaps, being dispelled.
In common with our creation of National Pension Tracing Day, helping people track down forgotten or mislaid pensions, and our involvement with The Money Charity – for broader financial coaching and guidance – we’re always try to find ways to make money make sense for people at every life stage. Annuities is one of those areas we’re trying to demystify in the same way. And it seems that, with more curiosity about them as a retirement tool, our focus might well be timely.
