A study conducted by the Open University has found that contrary to popular belief, annuity products offer ‘fair’ value for money for those looking to guarantee their income in retirement.
Whilst annuities have suffered by way of reduced interest rates over the past 25 years and along with a general increased cost of living, have not given customers the same kind of returns they did in the 90s, they still represent good value.
In fact, one of the major reasons that annuities now create less retirement income than they did twenty years ago is because we are all living much longer, so therefore the same amount of money has to go further than it did two decades ago.
The Open University study found that 97% of the reduction in retirement income from an annuity was down to increased life expectancy.
The report said that annuities should be looked at as an insurance against living longer than your savings or other investments will last.
A spokesperson for the Open University said that drops in annuity rates coupled with living longer doesn’t mean that they offer poor value for money, and stressed that they should still play a vital role in people retirement plans.
However, she was keen to point out that there can be up to 25% difference in annuity rates on similar products, so it was vital that anyone planning to buy an annuity really needs to shop around and if possible, seek the guidance of an independent financial advisor.
Many annuity customers make the mistake of taking the offer from their pension provider, without bothering to check if they could get a better product elsewhere.
In addition, many don’t realise that they need to declare all their health issues as this may mean they are eligible for an enhanced annuity if they are likely to die earlier than expected from unhealthy life choices or medical complaints, which offer considerably better rates than normal annuity products.
As from April 2015, anyone with a defined contribution pension can access their entire pension pot without having to buy an annuity product.
However, after receiving the 25% tax-free lump sum, any futher drawings from their pension will be subject to income tax.
Many people may find that they want to spend or invest some of their pension cash from next year, but also use part of their pension pot to buy annuity so that they do have some guaranteed retirement income for life.
Most annuity providers are coming up with newer, more flexible products that will suit a variety of needs.