Is this the final nail in the coffin for annuities?
I can answer this with a very clear and definite “no”. There is no escaping that a competent adviser or rational investor would question the wisdom of purchasing an annuity at these low levels, but once yields bounce back (if they do) annuities will come back into play.
The problem with annuities is not the concept of annuities, but the underlying interest rates. If we go back to basics, the reason why annuities are so important can be explained by looking at what would happen if there were no annuities. Investors would be faced with two issues; how much income to take and where to invest. Take too much income and they will run of out of cash later in life, take too little income and they will not have received the full benefit of their pension savings. Invest in risky assets and they will be taking undue risk, but to invest too cautiously they will be locked into poor returns.
An annuity solves these problems and provides the ‘optimum distribution of income’, as the academics say. One of the issues US academics have grappled with is the so-called ‘annuity puzzle’. If annuities are so good for people, why do investors shun them? The answer lies with a number of behavioural factors, such as the need for flexibility and the desire to leave a legacy.
In my view, there is a good future for annuities and I suggest two reasons. First, an annuity is the only policy that can pay a guaranteed incom /pension for the rest of the policyholder’s life with peace of mind and security. Secondly, annuities are a very useful retirement planning tool.
What are the key retirement planning issues for advisers and their clients?
Since pension freedoms, the new buzz word in retirement planning is flexibility, or to put it another way, “retirement is not an event but a journey”. I describe it as a transition from a position in their early 60s when people understandably favour flexibility and control, to the recognition that by the time they reach their 70s, peace of mind and security take higher priority. Annuities have an important role to play here because they can be used to de-risk a drawdown plan over time.
