The UK population favours annuities…they just don’t know it

Tilney research finds most people favour certainty over opportunity

New research from wealth management group Tilney has revealed the extent to which people are unsure of what they will do with their pensions upon retirement, with the majority admitting they have no idea.

When asked, 40% of those surveyed did not know what they would do with their pension when they retired. A fifth (22%) said they expected to keep most of it invested but draw some of their pot, while 10% would potentially cash in the lot – something they can now do under the “pension freedom” reforms instituted under the former Coalition Government but which might incur a hefty tax bill. Only 10% said they would use their pension to buy an annuity, a type of contract provided by life assurance companies to deliver retirees with a guaranteed income for the remainder of their lives. Annuities used to be the default option when converting private pensions into an income stream, but have plummeted in popularity in recent years.

However, while the intention to keep pensions invested during retirement – a process known as known as “income drawdown” - is three times more popular than buying an annuity, Tilney found that when the dreaded ‘A word’ was removed, 79% of respondents said a pension that provide them with a “guaranteed income for life” was more appealing than one where the value and income levels will vary year to year, even if it held out the potential prospect of better returns. This suggests the Annuity brand may be seriously tarnished but demand for what they aim to offer certainly hasn’t gone away. It also hints at a danger where too many people are walking into drawdown without sufficient planning and risking running out of cash early.

While a worrying 21% have no idea how much annual income they will need in retirement in order to fund the lifestyle they require, 38% are hoping to achieve between £10,000-£20,000. 22% are aiming slightly higher with £20,000-£30,000, while a quarter of the highest earners (£50k+) believe they’ll need £30,000 to £40,000 each year.

However, when asked what sized pensions pot they would need to provide this income at retirement, over half (51%) admitted they have no idea. In terms of their ability to fund their retirement to the extent they want, only 48% said they felt confident they could achieve this. Men were more optimistic than women, with 60% feeling confident, compared with only 37% of women.

Commenting on the findings, Andy James, head of retirement planning at Tilney, says: “Annuities do have a bad reputation. That is partly down to the fact that historically most people went with the default option offered by their pension provider rather than shopped around for the best deal, but it is also because the relationship between annuity rates and UK government bond yields is a close one and these have been decimated by Bank of England policies in the aftermath of the financial crisis.

“Since former Chancellor George Osborne stood up in Parliament in his March 2014 Budget and launched his ground breaking overhaul of pensions by saying no-one would have to buy an annuity in the future, we have seen 75% fewer people choosing to buy one when they retire* and the number of annuity providers has whittled down to just six since 2015. Indeed sales of annuity contracts hit their lowest point this century in the last quarter of 2016, with 17,000 purchased – a decline of over 80% on the same quarter three years early.

“However, a guaranteed income for life, which annuities provide very well, is clearly something that many retirees desire. It is difficult to resolve the level of sales of annuities with the need for certainty.

“Bond yields have started to rise again, albeit off a very low base, and there are now tentative signs of green shoots appearing in the annuities market. But our research suggests that rising yields and annuity rates also need to be accompanied by a process of de-toxifying public perceptions of annuities. In reality they should form the right solution for at least part of many people’s retirement plans.

“Drawdown is the right solution of some, especially wealthier savers who can perhaps endure a degree of uncertainty and fluctuations in income levels, but it is not right for everyone. I am concerned that the pendulum may have swung too far and some of those opting for drawdown without having put a careful plan in place to match their resources against estimated future costs and liabilities, could find they end up draining their pension assets way too rapidly and end up running out of financial resources part way through retirement. Taking suitable advice when planning for retirement is vital and for those opting for drawdown it is incredibly important to regularly review your arrangements to avoid problems later on.”

*Association of British Insurers ABI