Billy Burrows: Time for some radical thinking on falling annuity rates - Money Marketing
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With annuities at the lowest levels ever it is time to ask what the industry can do to help investors get the most from their pension.
How much do people know about annuities?
I guess it is because I am a sad person who lives and breathes annuities that I worry when I realise that most people don’t really know very much about annuities outside the conventional options. Most people know a lot about a relative small part of annuities for instance; the open market option, enhanced annuities and the annuity options, but their knowledge about other issues is limited.
I have been pointing out that annuity rates are so low that those investors who only live to their normal life expectancy will barely get more than their money back with a very low rate of interest. If annuity rates fell much lower that many investors may not even get their money back.
Poor returns from annuities
I am writing this the day after gilt yields have fallen to the lowest level since 1703. I follow the 15 year gilt yield, the same one that is used to calculate GAD rates and on July 18 the yield fell to 2.03%. Back in March the yield was 2.93%. Translating into annuity income this has resulted in a 5% fall.
My critics reply that annuities provide longevity insurance so somebody living well passed their allotted time will benefit considerably. This is indeed true but does not negate my argument that many will get a poor return from their annuity priced on today’s yields.
So if annuity rates are paying poor returns what can the industry do? Continue encouraging IFAs and investors to keep pouring money to products which are profitable for the companies but not meeting the needs of their customers or try to educate the market that they are other choices.
The critics chip in again that annuities do meet customer needs because they provide them with guarantees. Yes but what are they guaranteed to get. An annuity that meets their needs for the rest of their life, or guaranteed to pay a low level of income?
I don’t claim to know the answer because I don’t but I do know the right questions to ask and I worry that the right questions are not being asked. These questions include: are investors prepared to trade some of their annuity guarantees for the potential to getter a higher income in the future? If the answer is no then annuitants will be trapped into low paying annuities for the rest of their lives.
If the answer is yes then how can this be done without exposing the client too much risk and ensuring that they do not end up with an even worse annuity income?
I do believe that with annuity rates falling ever and ever lower the time has come for these issues to be seriously considered. The stakes are high. Maintain the status quo and millions of investors may end up with annuity income that barely pays the bills. Get it right and investors will get a much a better deal from their annuities.