All About Annuities
An Annuity is a serious business!
“An annuity is a very serious business; it comes over and over every year, and there is no getting rid of it”, wrote Jane Austen in Sense and Sensibility in 1811.
Annuities are still a serious business today because they are the only financial product that can provide a safe and secure lifetime income for retired investors.
What is an annuity?
An Annuity is an investment that guarantees to pay a secure income for the rest of your life, no matter how long you live.
In the UK there are basically two types of annuities; pension annuities (compulsory purchase) and purchased life annuities (voluntary purchase). All annuities share the following characteristics:
- An investment which pays a high income for the rest of your life no matter how long that is
- Converts a lump sum into a stream of future income.
- Enhanced rates are available for those in poor health
- When you die, payments stop, unless you have chosen a joint life annuity or a guaranteed payment period
- Payments remain level or increase each year
Annuities = income for life
The advantages of Annuities
- They are the only policy which guarantees income for life. (No matter how long you live)
- They provide a high level of guaranteed income
- They are simple to understand and give security and peace of mind
- Annuities are based on the concept of "mortality cross subsidy; those who live longer than expected are subsidised by those who die earlier than expected so they insure you against out living your assets
Short history of annuities
Annuities are one of the oldest financial contracts and their origins can be traced back to Roman times, when policies known as annua promised to pay income for a fixed term, or possibly for life.
Annuities were available in the Middle Ages, the most famous of which were known as tontines. These policies paid an income for life, and every year the payouts for those who died were spread amongst the survivors. The last surviving policyholder received the remaining capital. Thus they combined the concept of insurance with an element of gambling.
The last surviving policyholder received the remaining capital. Thus they combined the concept of insurance with an element of gambling. During the 1700s several governments including England and Holland sold annuities in lieu of government bonds. Today they play a very important part in retirement planning, and last year the annuity market was over £6 billion
During the 1700's several governments including England and Holland sold annuities in lieu of governments bonds. In the 19th century annuities were used to provide income for elderly relatives or employees.
Annuities and Pensions
However it was not until the introduction of self employed pensions nearly 30 years ago that annuities started to play an important role in the UK pensions market. The early self employed pension plans (s226 contracts) were in fact deferred annuity policies i.e. investors saved up for an income, but this income was secured by way of an annuity. Most contracts contained an open market option, which gave the investors the right to buy a better annuity from another company.
Personal Pensions were introduced in 1988 and required that an annuity had to be purchased to secure retirement income, and all these contracts contain an open market option, that is the right to shop around for the highest annuity income available.
Over the last decade the market for enhanced annuities has grown rapidly. These annuities pay a higher income for those in poor health and therefore have a below average life expectancy.
The market in the 21st century
In 2012 it was estimated that over £14 billion of pension annuities were purchased, of which about 40% were enhanced annuities. About £ 1 billion, 6% of the total market was investment linked annuities. The annuity market is growing rapidly, and the share of with enhanced annuities is increasing is increasing at the fastest rate.
In 2012 the market for good health annuities was dominated by Aviva, Canada Life and L&G. The enhanced annuity market is dominated by Just Retirement, partnership, LV= and MGM.
Over £2 billion was invested in drawdown.
Annuities at a tipping point - Billy Burrows looks at the case for investment-linked annuities
Low annuity rates must prompt pensions rethink - BBC Website
An annuity is a serious business - Billy Burrows writes for Bestinvest
MGM Advantage sold to TDR Capital - Posted by Billy Burrows
How to make the most of your annuity - ABI Code - By Teresa Hunter in the Telegraph
It's about more than just price shopping - Billy Burrows - Financial Adviser
Annuity Update - February 2013 - Billy Burrows
Pensions: Annuity sales to be investigated by FSA - BBC website
FSA to investigate pensions annuity market amid fears - Julian Knight - The Independent
Annuity rates 'to rise by 25pc' - Richard Evans - Telegraph