View more on these topics

A fundamental misunderstanding of annuities?


There has been a lot of noise in the press recently about annuities. The need for advice or not; the need to consider factors other than just the initial rate (spouse provision, death benefits and inflation proofing); the crossover point at which an annuitant will get back the full value of their pension fund. Age 82 has been quoted as the age at which full value will be returned and 90 to get good value.

It is difficult to believe that annuity rates were somewhere around 16 per cent in 1990, with the comparable rate today being something around 5 per cent.

At historic rates a degree of value was set but it has been a downhill journey ever since.

I am often asked if I have any feeling for the future of annuity rates. It is obviously difficult to say with certainty but the following factors do not look positive:

  • Greater longevity
  • The underwriting of annuities taking poor lives from the annuity pool
  • More people with larger funds doing income drawdown and taking large funds from the annuity pool
  • Gender discrimination rules
  • Solvency requirements for annuity providers
  • A continuing low-interest-rate economy, as recently announced by the Bank of England.

As I write, I note that gilt yields have risen to their highest level since 2011 and this could well be reflected in annuity rates but by very little.

Annuities have been around for a long time and for many years were the only way of converting pension funds into an income stream. When this was at 16 per cent this was not bad but at 5 per cent it does not look so good.

Since 1998 average annuity rates have fallen by more than 65%

Annual change in average annuity income since 1998

Figures based on a 65-year-old male buying a single life level annuity

Source: Moneyfacts


Average annual change in annuity income































Annuities are an insurance contract against long life, not an investment contract. With an insurance contract the expectation must be the payment of the sum assured and that is what annuities do.

They are based on averages although with the growth in enhanced annuities, more and more people are being underwritten and then being offered their own specific rate.

If an annuitant thinks they will live longer than the average life expectancy, then they will receive more than their money back.

If they die sooner, then some of this will be allocated to those who live longer.

The oft-quoted example is Henry Allingham, the First World War veteran who died age 113 after having an annuity for 48 years. 

Those who do live longer will see their annuity contract improve if viewed as an investment contract, as the mortality subsidy makes it harder to match the underlying investment return.

Buying an annuity is a big decision or, as the press has inferred, a gamble. 

But going into income drawdown (the alternative) and not understanding investment risk is also a gamble. 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.

For an interesting read, consider Why Don’t People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle, a US academic paper from 2008 which suggests that consumers evaluate annuities in a narrow investment frame that focuses on risk and return rather than a consumption frame that considers the consequences of life-long consumption.

The paper considers that, in an investment frame, annuities are quite unattractive, exhibiting high risk without high returns.

There are three things we could look at for the future:

  • The process – the ABI code of conduct has gone some way to making the annuity choice process more transparent – but perhaps there is still some way to go. The choices between rate and other features is perhaps difficult to build into a non-advised regime.
  • A few years ago I seem to remember a proposal being on the table to allow an annuity contract to be transferred from one provider to another – this was difficult due to issues such as rates, underwriting and selection issues. Perhaps this could be more easily facilitated now and is worth revisiting.
  • There was also a proposal to offer value protection on annuities but the 55 per cent tax charge on the proceeds made it unattractive and complex.

One of the current demands is for more transparency in annuity products and perhaps it is time for insurers to open the black box to show how the numbers work.

Annuities will always have an important place in retirement planning but it is essential that we understand their role and the solution they can provide.

Mike Morrison is head of platform marketing at AJ Bell


Projected increase in life expectancy at age 65

UK population Cohort life expectancy on reaching age 65 in the year shown (years)
























Source: Pensions Policy Institute



Ex-MoS journalist Stephen Womack begins IFA career

Former Mail on Sunday financial journalist Stephen Womack has started life as a financial planner after being hired by Northamptonshire-based firm David Williams IFAs. Womack quit the Mail in January to begin training as a financial adviser and has written a number of Money Marketing articles charting his progress (see related stories). Womack will work […]


Europe has turned a corner but what will the German elections bring

The recovery has begun. After six consecutive quarters of declining output the eurozone economy finally emerged from recession in the second quarter of this year. The monetary union, in aggregate, grew by 0.3 per cent compared with the first quarter, although the annual comparison remains negative at minus 0.7 per cent. Encouragingly, the improvement in […]


George Osborne concern over lack of 95% LTV mortgages

Chancellor George Osborne says the lack of 95 per cent loan to value mortgages is a “social problem” as he launched a fierce defence of the Help to Buy scheme and high loan-to-value deals. Speaking in London today, Osborne said the housing market was not working effectively, given house prices are down by a quarter […]


Towry agrees Bluefin acquisition

Towry has confirmed it is to acquire Bluefin Personal Consulting for an undisclosed sum. The deal to acquire Bluefin’s advice arm sees Towry take on 19 wealth planners and 70 support staff. It will also acquire 1,500 clients with around £500m of assets. Towry chief executive Andrew Fisher says: “We are very pleased to have signed […]

Investment clock economic update

In the latest Investment Clock economic update, Ian Kernohan, Senior Economist at Royal London Asset Management, discusses the implications of the US Federal Reserve’s recent hike in interest rates and upcoming French presidential election. The value of investments and the income from them is not guaranteed and may go down as well as up and […]


News and expert analysis straight to your inbox

Sign up


There is one comment at the moment, we would love to hear your opinion too.

  1. There is a fourth solution at which “we” should be looking and lobbying the government to allow (even if the prospect of our glove puppet pensions minister taking the slightest bit of notice is sadly remote), namely a Retirement Income Bond.

    1. The level of income payable would be geared to utilise the entire fund over the remaining underwritten life of the retiree (no link with GAD rates, so perceived value for money should be high), with

    2. allowance for a prudent rate of investment growth, say 5% p.a. This is hardly a high long term hurdle rate for any half decent fund. In fact, providers could set their own higher hurdle rate if they considered it viable though not a lower one,

    3. an insurance element against early fund burn out (which, being a long term future risk, I would have thought, shouldn’t be very expensive),

    4. any unspent element of the fund on second death should be allowed to pass down tax free into pension plans for the next generation (why the punitive 55% death tax on unspent funds?)

    5. the level of income being drawn could be re-underwritten periodically to reflect any deterioration in health (so no lock-in to a fixed-for-life annuity).

    When you think about it, this could be described as Secure Income DrawDown (SIDD, given the industry’s fondness for acronyms) and should be very nearly as secure as a gilts-backed conventional annuity ~ so why should the government be resistant to the idea? The only reasons I can think of are fear of a significant fall in demand for Gilts and/or political apathy. If providers were allowed to create and market such a product, who would opt for anything else? It would render the at-retirement planning process vastly simpler ~ who, in their right mind, would opt instead for anything shackled to GAD rates, particularly Insecure Income DrawDown? It would revolutionise the at-retirement market.

    Furthermore, more tax-assessable retirement income, apart from being good for retirees, would good for the central exchequer and thus good for tax payers generally. It would also increase spending, much of which generates taxable revenues (sales, corporate profits, higher employment, lower unemployment support, possibly even lower crime).

    I wrote and asked the government why it might be resistant to such a product, but all I received back was a typically bland, non-committal response saying they’d think about it. And that was that.

    Now, can anybody suggest why any honest, competent and responsible government, supposedly committed to the well-being of its citizens, wouldn’t be prepared even to entertain a study into the viability of such a product, instead of barging ahead with the imposition of employer-operated schemes that will auto-enrol people into a manifestly broken retirement savings system? I just don’t get it ~ unless, of course, it’s the familiar old story of pre-election manifesto rehetoric that has little if any relevance to the real agenda.

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm