'' the Vexing Question of the Stability of Annuities

The Birmingham Post (England), October 24, 2013 | Go to article overview

'' the Vexing Question of the Stability of Annuities


Byline: TREVORLAW

Questions have been raised in recent months as to whether annuities can provide people with a good level of retirement income.

Even those with relatively sizeable pension funds are not likely to be able to rely on annuity income alone to maintain their standard of living once they have finished work.

The government has therefore come under pressure from certain quarters to make changes to the annuity market. For those individuals looking to secure a stable income in retirement, an annuity still remains a viable option. As things stand though, the thousands of people who purchase annuities each year are understandably feeling a little short changed.

An annuity is a contract that enables people to convert their accumulated pension fund into a retirement income. However due to the current climate of low annuity interest rates it can take a very long time to break even.

A recent article in The Daily Telegraph has suggested that even assuming an annuity is purchased at the best rates currently available, it can take eighteen years to get your capital back. The example of a 65-year-old using a PS100,000 fund to purchase an annual income of PS5,870 is used to illustrate this point. This individual would be aged 83 before they began to see any return on their initial capital outlay. A number of annuitants are therefore not likely to live long enough to see any return. However, perhaps it is wrong to treat annuities as investment products and to judge their returns in such a context.

Writing for Money Marketing, Mike Morrison has said that as opposed to an investment contract, annuities should be regarded as an insurance contract against long life.

The head of platform marketing at the SIPP provider, AJ Bell, acknowledges the notion espoused by the mainstream press that due to the reasons outlined above, annuities represent something of a gamble.

However compared to some of the other sources of retirement income, notably drawdown, he regards them as a safer bet: "At least the annuity gamble will give you an income as long as you live while in theory the drawdown gamble could mean a significant drop in income before death."

An annuity should therefore still be considered by those wishing to convert their accumulated pension fund into a secure income. …

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