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Annuities undergo ‘make-over’: is it enough?

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Retirees are shunning annuities because of out-of-date misconceptions about the products, a provider claims.

Annuities have got a bad rap in recent years thanks in part to a damning investigation by the Financial Conduct Authority (FCA), which found many pensioners were picking the wrong plan and falling to shop around for the best deal.

The pension freedom reforms introduced in April 2015 were heralded as the final nail in the coffin for annuities, as they in effect removed the requirement for people to buy one at retirement.

However, Retirement Advantage said annuities – the only product on the market to guarantee an income for life – have received a “make-over” since the freedoms were introduced, which addressed many of the concerns people had about the product.

“The message that annuities have changed isn’t well known unless you receive financial advice, which could potentially mean people ignore them because of out-of-date preconceptions,” said Andrew Tully, pensions technical director at Retirement Advantage.

And it seems ignoring annuities is the last thing retirees should do.

“Pension freedoms might have reduced interest in annuity purchase for people entering retirement, but buying an annuity to at least secure a base level of income remains an important consideration for the majority of people in later life,” said Martin Bamford, a financial adviser at Informed Choice.

Here, Retirement Advantage debunks the top eight myths those approaching retirement have about annuities:

  1. “Annuities are poor value”

Shopping around, rather than accepting the offer made by your pension company, can improve your income significantly. The difference between the best and worst annuity rate in the open market is currently around 33%. Unfortunately, only a third (36%) of people are currently shopping around, and therefore people are missing out on millions of income.

  1. “The pension company keeps all the money if I die”

Since April 2015, providers have offered guarantees of up to 30 years or 100% value protection, so customers can be sure that their families will get their money back, and more if a longer guarantee is chosen.

  1. “I can’t leave my annuity savings to my family”

Customers can arrange for the original annuity purchase price to be paid to their beneficiaries (minus payments made), and if they die before age 75 there is no tax payable.

  1. “I’d be better off managing my own money”

People want the security and peace of mind that only a guaranteed income can provide.

  1. “I could get a better income using drawdown”

Drawdown is sensitive to volatility in the stock market; Retirement Advantage analysis shows that customers could have seen 5% wiped off the value of a typical drawdown fund in a year. While drawdown can produce a higher income there is also a risk that income could fall, and managing your money to last through retirement carries its own risks.

  1. “Annuities are a one-off purchase”

Customers can use pension savings to stagger the purchase of annuities to fit with the transition between work and retirement, or phase purchase from drawdown funds in retirement.

  1. “I can’t change or stop the income from my annuity if my circumstances change”

Using new ‘hybrid’ retirement account products, customers can redirect income from annuities into drawdown, for example if they return to work. This gives complete income flexibility while receiving a guaranteed income for life.

  1. “I won’t live long enough to worry about buying an annuity”

Average life expectancy for men aged 65 is 21 years, meaning they are likely to live until they are 86 years old, while for women it is 24 years, meaning they are likely to live to 89. Remember, these are just averages. At the age of 65 you have a one in four chance of living till 94 if you are a man and one in four chance of living till 96 if you are a woman.

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