Improving annuity rates in the past 12 months have also reduced the cost of ‘guarantees’, which can make them a more flexible and attractive options for retirees.
Research by Canada Life shows that the cost of buying a guarantee does not significantly reduce the income paid each year. These guarantees work in different ways, but essentially aim to provide ‘value for money’ should the annuitant die early. They can either continue to pay the pension income to a spouse or beneficiary for a set number of years, or return a portion of the capital used to buy the annuity.
In one example Canada Life found the difference between an annuity with no guarantee and one that would continue to pay the income for 20-year is just a 4 per cent drop in annual income. On a £100,000 pension pot, the no guarantee annuity would pay an annual income of £6,523, where one with a 20-year guarantee would secure an annual income of £6,270 — a difference of just £262 a year. There is an even smaller different for those looking for shorter term guarantee
Canada Life retirement income director Nick Flynn says: “As annuity rates have improved so has the cost of the death benefits available. No longer do clients need to trade off a big drop in income to provide valuable guarantees.
“The reduction in income from choosing a longer guarantee period which effectively provides a ‘money-back’ guarantee, is now so narrow as to cost peanuts, so it’s completely bonkers not to consider some guarantees to provide additional certainty.
“Now one of the biggest barriers to annuities, ‘I won’t get my money back if I die early’, can really be challenged and guaranteed periods need to be explored.”
How annuity guarantees work in practice:
- No guarantees: Immediately on the death of the customer, the income stops.
- Spouse benefits: A customer can choose to pay a portion of their original annuity income (up to 100 per cent) to a spouse on death, subject to a reduction in income. Upon the death of the spouse, the income stops.
- Guaranteed periods: A customer can opt for any income guarantee period between 1 year and 30 years, again, subject to a reduction in the income received. In the event of the death of the customer, the income will continue to be paid to a spouse or beneficiary for the remaining guarantee period.
- Value Protection (VP): A customer can choose to protect the capital purchase value of the annuity, up to 100 per cent, again, subject to a reduction in annual income. Upon the death of the customer, the difference between income received to date and the ‘value protected’ amount is paid to the spouse or beneficiary, in the form of ongoing income or the value can be commuted as a lump sum.