Annuities; legalised theft or best way to convert capital into income?

28 August 2019

Annuities; legalised theft or best way to convert capital into income?

We have been involved with annuities since they first became a topic of conversation almost 30 years ago. It is probably true to say that before 1990 hardly anyone knew much about annuities, but that all changed with the launch of specialist annuity brokers in the early 1990’s, such as Annuity Direct which later become Better Retirement.

At that time many people had an insatiable appetite for information on annuities as interest rates were as high as 10% and in most cases, it was compulsory to purchase an annuity. It was probably true to say that in the 1990’s annuities were a very hard act to beat and in many ways they are a hard act to beat today but you wouldn’t think that by reading the personal finance pages of the national papers or websites.

Legalised theft?

Annuities have had a bad press with headlines like “legalised theft” and my all-time favourite; “my dog could have done better”.

An eloquent critic

The negatively publicity is focused around two issues: no lump sum death benefits and low annuity income as most eloquently articulated by Lord Grantley speaking in a House of Lords debate on pensions in October 1997 when he said: “In my view, there are two overwhelming reasons why people should not invest in annuities under any circumstances.

  • The first is that investing in annuities is contrary to the interests of a family … in that they are worth nothing when the investor dies.
  • The second reason is simply that annuities are a lousy form of investment.”

So do annuities deserve such negative publicity, and have they outlived their usefulness?

The answer is a resounding no on both accounts for the following reasons:

Why annuities are a hard act to beat

  • Annuities are the only policy that guarantees income for the rest of your life no matter how long you live
  • Although there is normally no lump death benefit, most annuities are arranged on a joint life basis so income will continue to the surviving spouse or partner
  • Although the alternatives may appear attractive (e.g. pension drawdown) there are no income guarantees and there is the risk of running out of money in the future
  • There is a mistaken belief that drawdown will always produce a better outcome than an annuity
  • One of the most important things in retirment is have peace of mind and security, and only an annuity achieves this

There is no other way of arranging guaranteed income for life

In conclusion, annuities are a hard act to beat because there is no other way of arranging guaranteed income for life with peace of mind and security.

The grass may look greener on the drawdown side of the fence because you have flexibility and control but there are significant risks with drawdown.

If there is a problem with annuities it is the low interest rates which results in low annuity income but there is nothing wrong with the annuity concept which is the only way of converting your pension pot (or your own money) into an income for life, no matter how long you live.

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