Billy Burrows: Making your mind up on fixed-term annuities

Billy BurrowsI received an interesting email from an adviser this week. He’d been asked to review a five-year fixed-term annuity that had recently matured. The client was unhappy that the maturity value could not purchase a lifetime annuity paying the same income as the fixed-term annuity.

The adviser asked for my thoughts and if I had a view on the prospects for annuity rates in the future. My first reaction was how many other clients would be disappointed for the same reasons and whether fixed-term plans are a good option.

Billy Burrows: Three mistakes damaging client engagement

Fixed-term annuities are a form of drawdown where a guaranteed income is paid for a set period of time and a guaranteed amount is paid back in to the pension plan at the end of the term.

On the positive side, fixed-term plans provide valuable guarantees and the flexibility to use the maturity value to either purchase an annuity or invest in a traditional drawdown plan. If necessary, another fixed-term plan can be arranged.

On the negative side, the maturity value, although guaranteed, may not be able to produce a high enough income to justify locking up the pension pot for a fixed term.

Let’s consider a simple example. Someone aged 65 can get about £5,000 per annum gross by purchasing a lifetime annuity with £100,000. If this money was invested in a fixed-term plan paying the same £5,000 per annum, the maturity value would be £82,400 in five years’ time.

At that point, the investor will be 70 years old and £82,400 would purchase a lifetime annuity of just under £5,000. This assumes that the underlying annuity rate remains the same and the annuitant is still in good health. On this basis, it is safe to say the fixed-term plan would be a good idea because it provides the same guaranteed income as an annuity with a second bite at the cherry.

If annuity rates were lower at the end of the five-year term, the maturity value would not be able to purchase the same £5,000 per annum. However, if annuity rates went up, or the person could benefit from an enhanced annuity, they would be able to purchase more than £5,000 per annum.

Billy Burrows: Do not let status quo bias ruin plans for retirement

This leads me back to the central point; what are the chances of annuity rates rising over any five-year period?

As my annuity chart shows below, annuity rates have been in long-term decline since I began keeping records about 25 years ago. This doesn’t mean they will not rise in the future, and there are good reasons to think that rates will increase.

In my experience, very few people have benefited from deferring an annuity purchase because of the long-term fall in annuity rates. The only exception has been those who invested in equities and have seen the value of their pension fund rise more than annuity rates have fallen.

William Burrows is retirement director at Better Retirement

Recommended

Narrowing the gender gap in income protection

Traditional gender roles could explain why income protection appeals more to men than women Not enough people in general are protecting their incomes, but it is widely accepted that women are underinsured relative to men. Comparison website and protection broker ActiveQuote’s data for the first quarter of this year shows enquiries about life insurance were […]

Vertical integration still on the table for Australia after parliamentary backing

A key parliamentary committee has rejected legislation to end vertical integration in the Australian financial services industry. The Senate Economics Legislation Committee within the Australian parliament has today knocked back the proposed legislation, which could effectively have outlawed cross-selling. Committee chair Jane Hume says current legislative protections are “sufficient enough to ensure money held in […]

Editor’s note: Disclosure is key when it comes to conflicts

Picking investments is, I am reliably informed, a frighteningly tricky business. It’s why more and more advisers are choosing to “leave it to the professionals”, as it were, and focus on financial planning. That, or join a firm with a tightly restricted panel to choose from. But there are still a vast number who aren’t, […]

Jelf flexible benefits

In Focus: How to choose a flexible benefits provider — seven top tips

Jelf Employee Benefits looks at some of the key considerations employers should think about when reviewing and choosing a flexible benefits provider. Choosing the right benefits for your employees is one thing but delivering a successful employee benefits strategy is about understanding the complete picture and delivering it in a personalised way so that it resonates with each and every individual in your business. 

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    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

    Email: customerservices@moneymarketing.com