Annuities continue to play an important role in retirement planning, especially when it comes to securing a guaranteed income in later life.
But annuities are having a bit of a rough time at the moment with rates hitting a record low in August on the back of a fall in gilt yields.
Despite this advisers still believe they are an important product to have in retirement as they offer individuals a level of certainty, giving them comfort as they approach their older years.
Annuities pay retirees a secure income for the rest of their life. Savers cash in all or part of their pension pot in exchange for regular payments beginning either immediately or at some point in the future.
For Generation Xers, people born between the mid-1960s and the early-1980s, annuities are no longer mandatory in retirement so it is important that advisers remind these individuals of the benefits.
Due to the fact they offer a guaranteed income many people in the pensions industry still view annuities as a valuable product when people reach decumulation but increasingly they are being paired with income drawdown following the introduction of pension freedoms in 2015.
Helen Morrissey, pension specialist at Royal London, said that Generation Xers should consider using an annuity to provide them with a certain income while using drawdown to offer them some flexibility in the early years of retirement.
Ms Morrissey said: “Traditionally retirees either went into income drawdown or bought an annuity at retirement however, we are increasingly seeing retirees use both solutions to generate a retirement income.
“For instance, they will use an annuity to underpin a level of guaranteed income that meets their day to day needs while using drawdown for supplementary income.
“You may also find that retirees initially go into income drawdown when they retire and then annuitise at a later date which means they benefit from a higher income.”
William Burrows, retirement director at Better Retirement, also believes that a hybrid decumulation approach which combines annuities and drawdown is a better approach but annuities should be saved for later in retirement.
Mr Burrows said: “An annuity is a good policy because there is no other way of getting a guaranteed income for life – in fact there is a mistaken belief that drawdown always provides a better outcome.
“Most people are probably better off starting their retirement journey with the flexibility and control of drawdown and then considering annuities later in life.
“The short answer is, annuities don’t fit into the short term plan but later in life, say after age 65 they may become very important.”
But Mike Lacey, partner at financial adviser firm Bowman Pension Consulting, has warned that Generate Xers should ask an adviser whether an annuity is the best product for them before they go down this route.
Mr Lacey said: “I am concerned that with annuity rates at record lows, people should not purchase a lifetime annuity unless it is absolutely the right thing for them to do.
“I would like to see greater use of temporary annuities as I expect the outlook for annuity rates is to increase. Even if they don’t, an annuity purchased in five or ten years will likely give a better return as – obviously – the client will be older. Their health may also have taken a turn for the worse, and so impaired life annuities could be investigated.
“There is no doubt that the certainty of an annuity will give comfort to many people, even if it might not be the absolute best product for them.
“I’d like to see yet more coaching on the importance of shopping around when purchasing annuities at retirement – I think far too many people assume that their accumulation provider is also a top decumulation/annuity provider – which will almost certainly not be the case.”
Tim Morris, independent financial adviser at Russell & Co, said that he expects that more Generation Xers will look to annuities for their guaranteed income as previous generations had defined benefit pensions which would do this.
Mr Morris said: “Historically, final salary pensions meant people would expect a guaranteed income for life with some inflation proofing.
“When I started advising 15 years ago, annuities were the default option. Back then, I came across many clients who were having to accept a small annual payment from their private pension. Luckily, they would more often than not have this supplemented by a final salary pension.
“That luxury is not one afforded to generation X. For most, they have little idea what their pension will provide them as a retirement income.
“This may well have created a negative perception towards annuities. This is where advice comes in. As the value of their retirement savings increases, the more engaged many become.”
Advisers have also suggested that the negative perception towards annuities could be avoided by instead referring to them as guaranteed income to encourage take up among Generation Xers.
Mr Lacey said: “The word ‘annuity’ may be putting people off; it is a slightly archaic term and I’ve seen the suggestion that it gets referred to as something along the lines of ‘guaranteed income’, or ‘guaranteed income for life’.”
But Mr Burrows believes that it is not the name of the product but rather the poor rates that they offer which gives them poor publicity.
He said: “I don’t think the word annuity puts people off, but the low income from annuities does.
“It’s a catch 22 – people don’t like annuities because the rates are low but annuities only reflect the low interest rates since the 2008 credit crunch.”