Why retirees shouldn't write off annuities
Annuities have a bad reputation, but most retirees would be better off buying one, says David Prosser.
Opinion pollsters know well that the way they ask a question can hugely affect the answers they get. Take a survey just conducted by Tilney, a wealth manager. Would you buy an annuity with your pension fund on retirement, the firm asked savers. Just one in ten said yes. Then it asked the same group whether they would prefer a guaranteed income for life in retirement over one that varies each year, even if the latter could turn out to be higher. Eight in ten said they'd go for the guarantee.
The research underlines the extent to which the word annuity has become toxic since the pensions freedom reforms of three years ago. Describe what an annuity offers, and savers like the idea very much. Use the dreaded "A word" and they start rushing for the emergency exit. The worry now is that many are opting for income drawdown by default, despite having little knowledge about managing a portfolio of investments. As many as a third of savers opting for drawdown don't take financial advice on choosing a product or managing their money, says the Financial Conduct Authority, the City regulator.
Income drawdown works well for many. If you have a large pension fund and accept that your income may fall as well as rise over time, it's reasonable to consider taking the risk of continuing to invest in the hope of securing more growth. If you're confident enough to manage this process, or have an adviser to do it for you, so much the better.
You can find good value
However, that does not describe the majority of pension savers. They would very often be better off with the safety net of an annuity. Indeed, even wealthy savers often choose to use part of their pension pot to buy an annuity, providing a baseline level of guaranteed income, and then invest the rest. And it's not as if annuities offer poor value. It's true that rates are far less generous than 20 years ago, but in part that reflects the advances in life expectancy we've seen over that time. In any case, the benchmark annuity rate has actually risen more than 20% over the past two years, amid expectations of higher interest rates. Many people, moreover, qualify for higher rates because of their health, lifestyle, occupation or even where they live.
Even if you're anxious to be able to leave unused pension savings to your heirs, you can buy an annuity with this provision built in. Look for one that has a guaranteed period in which the income agreed continues to be paid to your beneficiaries, even if you have died before it comes to an end.
Shop around for the best deals
The golden rule about buying an annuity is never to take the income you are offered by your current pension-plan provider without checking first whether you can do better elsewhere. You have an absolute right to buy your annuity from another provider, and doing so will very often mean securing a higher rate of income.
A specialist annuity adviser can help you decide which features to look for in a product. Do you need benefits for a spouse or other dependants, for example, and to what extent do you want to protect your income against the effect of inflation? Your personal circumstances are also crucial, with many providers now pricing their products much more individually according to factors ranging from your health to the job you did before retirement.
At the very least, go to the free Money Advice Service website, which offers an annuity comparison tool. Use this service as a starting point for considering your options.
Auto-enrolment: a job half done
Good news and bad news on auto-enrolment. The latest figures from the government show more Britons than ever before are saving for retirement. Yet the average amount being saved is lower than ever. Some 84% of eligible employees are now taking advantage of a workplace pension, the Department for Work and Pensions says, with the total value of savings in such schemes hitting £90.3bn last year, up by £4.3bn on 2016. However, the average amount saved fell to less than £3,900.
The data serves as a reminder that the auto-enrolment regime introduced in 2012 represents a job that is at best half done. We should celebrate the fact that participation rates in workplace pensions have tripled since employers were forced to offer a scheme and enrol all those workers who haven't opted out. On the other hand, a generation of new savers putting money into pensions with high expectations of what this will mean for their standard of living in retirement may be disappointed, given current savings levels.
This year's increase in minimum contribution rates under auto-enrolment will help to some extent, and further increases are planned. But savers also need to be persuaded to contribute more than the minimum.And let's not forget, either, that auto-enrolment is of no use to Britain's five million self-employed workers, to whom it doesn't apply.
Tax tip of the week
Users of ultra-low-emission vehicles (ULEVs) are eligible for tax benefits, says the Office for Low Emission Vehicles. (ULEVs are those that emit less than 75g of carbon dioxide for every kilometre travelled.) For example, zero-emission vehicles that are valued at less than £40,000 are exempt from vehicle-excise duty, while electricity used to recharge a plug-in vehicle at home attracts only a 5% level of VAT, much lower than road fuels (20%). From 6 April 2018, employees charging their own electric vehicle at work are not liable to pay tax on the value of the electricity used. Finally, ULEVs fall into the two lowest bands (0-50g/km and 51-57g/km) for the taxation of company cars (which, as a benefit in kind, are subject to income tax and national insurance). Cars in these bands are charged at a lower rate than those that emit more carbon dioxide.