According to Jon Scannell, Legal & General’s Distribution Director, Retirement Income, annuities do more than offer a guaranteed income to risk-averse clients. He argues that advisers should consider the more flexible role that annuities can play in decumulation strategies.
Setting the scene in his recent FT Adviser article, Jon emphasises the vital role that financial advisers have to play in helping clients aged 55 or over to make informed choices about retirement planning.
In Jon’s view, this includes providing information about annuities: “The annuities market has experienced a lot of change over the last few years following the introduction of pension freedoms in 2015. Since then, the market has started to settle and rates are increasing, making annuities an attractive option for retirees.
“An annuity may not always be the right choice for every customer, but by not including these important products in the retirement toolkit, advisers could be missing a trick.”
Let us take a look at some of the main points Jon makes in his article, which can be read in full here and qualifies for approx. 30 minutes’ CPD.
We would like to thank Jon for his permission to reproduce large extracts from his original article.
Options are available for clients who want to make sure their spouse, registered civil partner, financially dependent partner or child is looked after when they die.
Jon explains: “This will usually mean that your client will need to accept a lower monthly income while they are alive, and they will need to take numerous factors into consideration – for example, whether their spouse has a pension or annuity of their own.
“It might be worth suggesting a guaranteed minimum payment period to your client. This offers a term of up to 30 years from the date the annuity starts, with the maximum age at the end of the term being 100 years old.
“This means any income will continue to be paid to the client’s estate or nominated beneficiaries at the same level, if they die during the guaranteed minimum payment period.”
Guaranteed period vs joint life annuity
Joint life annuity
These offer more income since some providers recognise that people with ill-health or lifestyle issues such as smoking are not expected to live as long as those with a clean bill of health. For example, a smoker could see an income uplift of approximately 12%, while a consumer with Alzheimer’s could see up to 145% more than the standard rate.
Potential enhanced annuity income
This table shows the estimated increases from medical or lifestyle conditions compared with someone with a clean bill of health where their standard annuity income would have been £5,000 per year.
Source: quotes from Retirement Line’s portal on 16 April 2019
Worryingly, according to research by Legal & General, up to 76% of over 55s wrongly assume medical conditions or their lifestyle will reduce their retirement income¹. The opposite is of course true.
This is why Jon says: “Many lifetime annuities can be purchased on enhanced terms, so it is important that you capture as much medical information as possible from your client.
“Essentially, clients should be encouraged to disclose their medical background, as they could find that they qualify for higher rates.”
Jon’s article covers the flexibility that can be offered by a fixed term annuity, which pays a set amount of income over a chosen period of time: “Your clients will have the option to choose the amount of income they want to receive, as well as the maturity value they want to get when the annuity term ends. Choosing a higher income will reduce the maturity value, while a lower income will increase that lump sum figure.”
|Five ways fixed term annuities offer excellent flexibility|
|1. Bridging a gap until other income is available.|
|2. Avoids committing to a lifetime annuity.|
|3. Optional death benefits.|
|4. Term from 1 to 25 years.|
|5. A ‘no income’ option to preserve a guaranteed lump sum at maturity.|
Jon points to several of the ways in which a fixed term annuity offers flexibility:
Jon also mentions that there is the additional choice of taking no income during the term of the annuity, just the 25% tax-free cash allowance at the outset. This gives clients the benefit of accessing their tax-free lump sum - perhaps to pay some debts or even pay off their mortgage - and deferring taxable income to the end of the plan instead. At that time, clients can of course choose to use their lump sum payment to fund another annuity or other retirement income solutions.
Some clients will want to annuitise all of their DC pension pot in order to guarantee a safe and predictable income in retirement. When certainty and peace of mind in later life is essential, an annuity will often fit the bill.
Jon points to one of the reasons that an annuity might be chosen: “Longevity is creating even more uncertainty for consumers, who may now have to make their savings last 20 or 30 years.”
But as Jon points out: “Retirement planning has moved from a single decision made for retirees, to an ongoing process. It gives advisers the opportunity to introduce annuities at the right stage of their client’s retirement. This could be a fixed-term annuity at the start of retirement, or a lifetime guaranteed income at a later stage.
“Annuities can and do play an important role in modern retirement planning, whether as part of a phased retirement or in combination with income drawdown.”
Jon concludes his article with some points about the role of advisers: “Advisers have a central role to play in the annuity market. Consumers increasingly need the support of advice to help them make informed decisions about later life.
“Advisers are now reconsidering the valuable role annuities could play in their clients’ retirement plans.”
Jon Scannell, Distribution Director, Retirement Income, Legal & General
“There are clearly misunderstandings among consumers, which is why it is so important that our industry talks about retirement and annuities, removing the jargon and explaining the options available in a clear and helpful way.
“Our recent research with Demos, called 'The Retirement Income Riddle', also suggests that 50,000 retirees in the lowest 50 per cent income bracket who have not taken out an annuity could be finding life more difficult as a result².
“There are advisers who are now reconsidering the valuable role annuities could play in their clients’ retirement plans.”
¹ “Retirees risk annuity income going up in smoke by hiding lifestyle habits” Money Observer, October 2018, https://www.moneyobserver.com/news/retirees-risk-annuity-income-going-smoke-hiding-lifestyle-habits
² “The retirement income riddle” Legal & General report, 22 November 2018, https://www.legalandgeneralgroup.com/media-centre/reports/the-retirement-income-riddle/