Annuities Are Not All Bad, Claims New Report

New pension freedoms coming into force from April 6 increase the chances of people running out of retirement cash before they die, according to new research.

The study takes four pension options and looks at how they may affect retirement incomes.

The results suggest that 1.1 million new retirees face trying to make ends meet on an inadequate income even if they put the cash into an annuity offering a guaranteed income for life.

The report for financial giant Aviva by the International Longevity Centre-UK (ILC-UK) coincides with Chancellor George Osborne announcing he will extend pension freedoms to annuities from April 6, 2016 in Budget 2015.

Big ticket purchases

The study also suggest another 350,000 people are likely to put themselves in financial difficulty by blowing their pension savings on big ticket purchases like cars and holidays, while 850,000 more will have retirement income falling short of their expectations because they will make poor investment decisions.

The main conclusions of the survey are:

  • Guaranteed income for life annuities should play a part in retirement investment strategy – but more than 1 million retirees do not have big enough pension pots to provide the return they need from an annuity
  • Spending too much pension cash too quickly will not leave enough money invested to replace savings needed for later years
  • Drawing out pension cash and putting the bulk in savings will slash the rate of return because savings interest rates are less than pension fund growth rates
  • Keeping the fund invested in a pension based on share prices is a risk because volatile markets could wipe out the value of a fund

The report explains that many people do not make sensible financial plans for retirement because they underestimate how long they will live after they stop work and how much money they might need to spend.

Investment risk

ILC-UK senior research fellow Ben Franklin said: “The report is not aimed at giving everyone personal investment advice for retirement.

“The research suggests that those that have a lot of money in a defined contribution pension can minimise the risk of losing cash when the stock market falls by putting some into an annuity.

“Annuities get a bad press, but they can be a sensible financial investment for producing an income in retirement for many. Without them, a lot of over 55s could end up significantly worse off in retirement.”

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