Annuities get a new look

Annuities have long suffered a bad press. Not only have rates tumbled as people live longer, but pension providers have failed to tell customers they can shop around for a better deal. Then there’s the inflexibility of annuities, not to mention the fact that if you die early on a good chunk of your savings is likely to go straight back to the insurer.

However, since the pension freedoms, this unloved product has had something of a face-lift. Andrew Tully, pensions technical director at Retirement Advantage, explains: “The new rules have given us the opportunity to correct some of the features people dislike – the key being the inability to pass your pension on to loved-ones when you die. “We are now able to offer longer guarantees or value-protection, which we prefer to call money back.”

Money back annuities

Under the old rules the maximum guarantee providers were able to offer was 10 years. Payments were guaranteed for that period, irrespective of when you died, so if that was two years into a 10-year guarantee payments would be paid for a further eight.

The new rules allow guarantees of up to 30 years – meaning you could get all your money back – or potentially more. An alternative way of ensuring you get any unspent funds back when you die is value protection. “So if you gave us £100,000 and took £6,000 a year for five years we’d give you £100,000 less the income you’ve received as a lump sum, so in this case £70,000,” adds Tully.

Value protection itself is not new. However, death tax of 55% on the dependant’s payout meant it wasn’t worthwhile. Now the tax treatment of these payments has changed, the benefit looks more appealing. Tully explains: “No inheritance tax will be payable and if you die before 75 it will also be free of income tax.”

However, while these features do overcome some of the concerns people have, they come at a price and reduce the overall level of income you receive.

How much does protection cost?

According to figures from Retirement Advantage, a £50,000 annuity would pay £3,054 with no value protection or £2,785 with 100% value protection (for a 65-year-old smoker). A healthy 65-year-old would get £2,752 a year without any guarantees  – to add a 10-year guarantee would cost £30 over the year, rising to £163 to guarantee it for 20 years, or £379 for the maximum 30-year guarantee.

More flexibility

Other rule changes mean annuities can also be more flexible. For the first time, annuity providers are able to let customers vary their income as their circumstances change. This could help those planning a phased retirement, for example. However, while the new rules allow providers to make these changes, they are not obliged to and as yet none are offering this functionality. “It’s not what our customers want,” says Steve Lowe, communications director at Just Retirement.

One new flexible feature Just Retirement has introduced is the ability to take out a lump sum at the start of the contract, beyond the initial tax-free cash. Although there may be tax implications of taking this money, it can provide a helpful boost for some customers. “Lots of people are using it to settle debts such as credit cards or mortgages,” notes Lowe.

But it’s not just annuities themselves that have changed – the wider freedoms mean the way in which people use and buy annuities is changing too.
John Perks, managing director at LV= says: “The biggest change really is that people don’t have to put all their money into an annuity at once.”

Using annuities alongside other products

“Some people might defer buying an annuity for 10 years or so, using income drawdown in the interim or a blended solution,” he adds. It’s this mix-and-match approach that Perks really expects to take off. “Blending is a stronger solution than deferring an annuity purchase – putting all that money at risk and having an annuity as a backstop.”

So rather than investing their entire pot in an annuity, more people will guarantee enough income to pay the bills and leave the remainder invested. Although this will only be an option for those who have money left, after those essentials are covered.

Having some guaranteed income and leaving some money invested can help strike the balance between security and flexibility but the need to choose and manage investments may put some retirees off.

All-in-one solutions

For this reason, providers have been busy developing plans that will make it easier for retirees to mix and match, with both Partnership and Retirement Advantage recently launching plans that combine an annuity with income drawdown.

These offer retirees the comfort provided by a secure income with access to a capital lump sum when required. Retirement Advantage is pitching its plan at those with between £50,000 and £200,000 in their pension.

“At 60 somebody may put all of their money into drawdown,” says Tully. “At 65 they may start working part-time and use £20,000 to buy an annuity then at 75, or so, purchase another £30,000.”

“It’s for people who would have traditionally bought an annuity, but now don’t want to put all of their money into one,” he adds. Further flexibility is also provided by the ability to switch annuity income on and off.

Both plans are designed to be simple and are not for those who want to be actively involved in choosing and managing investments, as they offer only a narrow range of funds.

Click here to find out how to buy the right annuity for you.

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Your Comments

I have a guaranteed annuity for five years.  What will happen when that period is up.  It would mean that there should be around 20k left in the pot.  How would I go about getting some of it back?