Temporary annuities as an option
Purchasing a lifetime annuity used to be a pretty safe decision. Individuals reached retirement age and a lifetime annuity provided for the rest of their life, which was often, sadly, a short period. Now, longevity has increased such that an average 65-year-old man can expect to live around another 17 years and the average 65-year-old woman, around 19 years (source: Office of National Statistics, 2004).
Lifetime annuities are no longer the only choice. Since 1995, income drawdown means a pension fund can remain invested, with an income taken from the fund. Then, from 75, either an annuity is purchased, or an alternatively secured pension or a scheme pension can be utilised.
Impaired life and enhanced annuities are now widely available, boosting annuity rates for those in poor health or with adverse lifestyle factors, such as being a smoker.
Another option is to take a temporary annuity, which avoids the issues of buying a lifetime annuity. This is something that is increasingly difficult for younger retirees, in their fifties or early sixties, to deal with; after all, who buys a car or a house knowing that they will have to keep it for 20 or 30 years, regardless of any changes in their lifestyle or financial position?
Canada Life and Living Time both offer a temporary annuities in the UK and Living Time chief executive, Kim Lerche-Thomsen, believes that changing retirement trends are making lifetime annuities a less attractive option: “Things do happen in retirement. A temporary annuity allows people to test-drive their retirement and see how they like it.”
A temporary annuity can be bought for a fixed period, usually with a minimum of five years and a maximum of the period until age 75 is reached. The annuity income is set for the period and at the end of the period, a pre-determined sum is available to the policyholder. This can be used to buy another temporary annuity, or a lifetime annuity, or for income drawdown.
As people get older, they will be able to make more informed decisions. Their health may fail, so they may be eligible for an enhanced or impaired annuity. Recently there was a case where an enhanced annuity gave the recipient an income 60% higher than a conventional annuity.
The Office for National Statistics found that of the 17 years an average 65-year-old man could expect to live, only 9.9 years would be disability free. For women, 10.7 disability-free years could be expected out of 19 years average life expectancy at 65.
According to Lerche-Thomsen, conventional annuities offer unattractive rates at younger ages, as the mortality cross-subsidy has not really kicked in. “At 60, the chances of dying are very small. Even at 75, it is only a 2% chance a year,” Lerche-Thomsen said.
Another reason for using a temporary annuity for part of retirement is that an individual’s spouse may die, so that a spouse’s pension is not needed when a lifetime annuity is purchased at a later date. If a spouse is known to be in poor health, this is particularly relevant.
It may not be risk-free, but for younger retirees with a long retirement ahead of them, the idea of locking into a lifetime income that will not change may be unattractive. Temporary annuities can help keep options open and should be considered as part of retirement planning by individuals and their advisers.