After being critical of the Telegraph they recently printed an article entitled “Are you one of a million annuity rebels?” The point which I found interesting was that with the drastic decline in annuity rates retiring workers are turning their back on annuities.
Often the drop in annuity rates is blamed on two factors, the decline in gilt rates and poor investment returns. Crucially we forget that people are living longer and as a consequence of living longer annuity rates decline.
To provide an idea of this – in the sixties life expectancy was around 5 years after age 65, this increased to ten years in the eighties and now we are looking at around 20 years.
This means that providers of annuities are going to be paying the income a lot longer and when combined with lower gilts this drives down the annuities that are available.
You could also bring in the argument as to whether we should expect to retire at 65 but that is a different point for discussion!
This also brings a secondary challenge. When you consider life expectancy one of the greatest fears for pensioners is the loss of money. So if you had a lump sum and you were expected to live for five years you would put it in a building society. A decent interest rate would ensure a decent income. But two things have changed, firstly interest rates are at a much lower level than they were 20 or 30 years ago so you cannot rely on it to provide an income.
Secondly we are living longer (the same point with annuities), and this means we have to make the money we have saved work for us for a longer period of time in retirement.
Taking both points our mind-set needs to move from a “risk-free” attitude and cash to “risk-on” and away from cash. This is where financial planning is crucial.
Annuities certainly where they are your only source of income (excluding the state pension) and where your pension pot is small may be the only option but for those with different sources of investments a smarter look at retirement must be considered.
It is not about rebelling against annuities it is about proper financial planning whether you do this yourself or pay a financial planner to do that for you. Playing on this point with the changes coming in from 1 January Lord Flight fears that between 2.5 and 5 million people will be left without financial advice.
This is a problem many direct operations do not provide true financial education (in terms of financial planning) and therefore people are left struggling to make what are crucial decisions in retirement and with the retirement market ballooning over the next 10 years this is a real worry.
So what do you do – well there is really no easy way to draw a line in the sand but where you have say less than £100,000 in a pension pot and no other sources of income then certainly you should consider an annuity and perhaps using some of the non-advised services may help. But crucially before you do that, work out what income you need and then work out the best option to achieve that.
For those with other sources of income then again follow the same route, work out what you need and then look at all your sources of income. It could be at this stage that actually for the peace of mind that it gives you going to a financial planner is money well spent. If you don’t want to do this then you need to be prepared to take control of your investments and income in retirement.
In conclusion the headline and article is excellent but underlying this reflects the need for careful financial planning whether you do it yourself or go to a professional. Assuming annuity rates might get better is half the story, to be honest gilt rates might get better but so will life expectancy so actually as one might push annuities up the other will push it down!
Being a rebel is one thing but don’t be a rebel without a goal!
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.