Annuity system isn't working, say financial advisers

Retirement funds

Seven out of 10 advisers say that the annuity system is failing retirees, according to research from Skandia.

The latest Adviser Insight Survey also revealed that nine out of 10 advisers see income drawdown schemes as an increasingly important and attractive alternative to a traditional annuity.

Annuities providing a fixed income for life have been the default for the majority of people retiring on defined contribution pensions. Typically retirees have bought an annuity from the company managing their pension fund, rather than comparing rates in the open market.

Although there is an increasing awareness of the potential to improve pension income by shopping around, Skandia says around 400,000 people a year still opt for an annuity.

However Adrian Walker, pensions expert at Skandia, says times are rapidly changing. "Longer life expectancy has been consistently eroding annuity rates over the years and when you take the impact of inflation into account, an annuity income can look meagre for many people."

Best value for a single life level annuity for someone healthy aged 65 with a £100,000 pension pot is around £6,200 a year, according to the Annuity Bureau; that's up from around £6,000 over the past three months, but rates remain historically low.

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Income drawdown enables people to take an income from their pension savings while remaining invested in the market. Walker says the need for sustainable income over an increasingly long lifetime, and in the face of inflation, makes this an attractive option. "But advice is important to ensure it is sustainable and fully understood," he adds.

Flexible drawdown

The Skandia survey suggests the increasing importance of income drawdown is largely due to the introduction of 'flexible drawdown' in 2011. This gives retirees who already have a pension of £20,000 or more freedom to draw income as and when they like, with no cap on the amount.

In contrast, 'capped drawdown' limits the annual sum available from a pension fund, though it can be varied from year to year.

However, income drawdown is not the only alternative to an annuity. Fidelity points to those who remain working in a full or part-time capacity as increasingly par for the course.

"While having a guaranteed annuity income is attractive, a more flexible approach may be more desirable. Your retirement choices will depend on how much you have in your pension pot, whether you intend to continue working in some capacity, and what other sources of income you have," says Richard Parkin, head of retirement at Fidelity.

This article was written for our sister website Money Observer