I guess it is because I am a sad person who lives and breathes annuities that I worry when I realise most people don’t really know very much about annuities outside the conventional options.
The majority of people know a lot about a relatively small part of the sector – for instance, the open market option, enhanced annuities and the annuity options – but their knowledge about other issues is limited.
I have been pointing out that annuity rates are so low that those investors who only live to their normal life expectancy will barely get more than their money back with a very low rate of interest. If annuity rates fell much lower, many investors may not even get their money back.
I am writing this the day after gilt yields have fallen to the lowest level since 1703. I follow the 15-year gilt yield, the same one that is used to calculate GAD rates and on 18 July, the yield fell to 2.03 per cent. In March, the yield was 2.93 per cent. Translating into annuity income this has resulted in a 5 per cent fall.
My critics reply that annuities provide longevity insurance, so somebody living well past their allotted time will benefit considerably. This is indeed true, but does not negate my argument that many will get a poor return from their annuity priced on today’s yields.
So if annuity rates are paying poor returns, what does the industry do? Continue encouraging IFAs and investors to keep pouring money into products that are profitable for the companies but not meeting the needs of their customers, or try to educate the market that they are other choices?
The critics chip in again that annuities do meet customer needs because they provide them with guarantees. Yes, but what are they guaranteed to get? An annuity that meets their needs for the rest of their life or guaranteed to pay a low level of income?
I don’t claim to know the answer but I do worry that the right questions are not being asked.
These questions include: are investors prepared to trade some of their annuity guarantees for the potential to getter a higher income in the future? If the answer is no then annuitants will be trapped into low-paying annuities for the rest of their lives.
If the answer is yes, then how can this be done without exposing the client to too much risk and ensuring they do not end up with an even worse annuity income?
I do believe that with annuity rates falling ever and ever lower, the time has come for these issues to be seriously considered. The stakes are high.
Maintain the status quo and millions of investors may end up with annuity income that barely pays the bills. Get it right and investors will get a much a better deal from their annuities.
Billy Burrows is director of The Retirement Partnership