Navigating a changing landscape - Annuities
The decision about how to access a pension pot is perhaps trickier than it’s ever been.
Historically, annuities were the most popular retirement vehicle, and will have proved a sensible approach for many – especially when rates were attractive.
The arrival of pension freedoms in 2015 has meant consumers now have greater choice on how to access their pension pots.
Plus, a combination of falling gilt yields and increasing longevity has sent annuity rates crashing to record lows.
Navigating the retirement landscape can be a challenging task for advisers and consumers alike.
John Porteous, head of distribution at Charles Stanley (one of the leading investment management companies in the UK) highlighted the importance of individuals making the right retirement choices.
He explained there was an increasing tension between the actual assumption of the transfer of wealth, and the aspirations of people approaching retirement as more of the Generation X (who are typically born between 1965 and 1980) are increasingly less confident about their personal retirement than baby boomers (typically born between 1946 and 1964).
He said: “The bank of Mum and Dad, that has actually funded everybody through school, through college, through an initial deposit, is having to call in the debt.”
“Most of the younger generation are expecting to have to provide financial assistance to their parents.”
So, are annuities still relevant or have they lost ground to other retirement mechanisms?
Paul Speight, head of key account development at Canada Life said “There are an awful lot of people who are now not buying an annuity. Most people are accessing their pension funds to get their lump sum.”
He stressed that annuity sales have plummeted since the introduction of pension freedom rules in 2015, and the annuity market has seen a significant shift away from advice.
“If drawing income from a defined contribution plan is now how consumers plan to take their retirement income, it’s a case of not buying an annuity or not buying it yet?”
Helen Morrissey, spokesperson for long-term savings and retirement at Royal London, said annuities still had a pivotal role to play in retirement portfolios. “It’s certainly not the end of annuities for the vast majority of people. For most people at some point in their retirement there is going to be a need for a guaranteed income.”
Mr Speight said: “It’s not about whether to buy an annuity, it’s just about when and where.”