The Risks in Buying Annuities

Pensioners take ‘the biggest gamble’ of their lives when they buy an annuity to provide for their retirement.  According to the former Downing Street pension’s adviser Ros Altmann, “Pensioners are not properly warned about the risks involved in buying annuities and they would have to live until the age of 90 before their annuity became ‘good value’…”

This means that millions of pensioners forced to turn their nest eggs into a retirement income, or sell other assets, were undertaking a ‘high risk’ enterprise that could cost them most of their hard-earned cash. Annuity rates, which determine how much a pension pays, are at an all-time low. With ongoing turmoil in the eurozone pushing annuity rates even lower, workers poised to retire are facing a massive blow to their pension income. 

Annuities, which are bought by those retiring in exchange for providing an income, have been collapsing for some time due to the Bank of England’s money-printing efforts. Now rates face further pressure from renewed uncertainty stalking Europe’s single currency, due to the link between the gilt and annuity prices. 

These circumstances are leaving most pensioners with little option but to buy an annuity if they want a guaranteed income in retirement, which will see them lose much of their nest egg if they die young, become ill or if inflation rises.
Dr Altmann, the former pensions adviser to Tony Blair, warned that pensioners who buy annuities at 65 will not get their money back unless they live until the age of 82, and would have to reach 90 before their annuities became ‘good value’.

She further added: ‘Far from being a low-risk purchase, buying an annuity could be the biggest gamble you ever take in your life. An annuity purchase is a long-term investment decision, which risks losing much or all your money, yet people are given no risk warnings about the dangers of buying.’

‘If you buy a financial product that can lose more than three quarters of your money, it would usually be considered “high risk” – and those selling it to you would surely have to give you a proper risk warning. Buying an annuity is considered the “safe” thing to do when reaching retirement. This is misguided. The “safety”’ only refers to the fact that the amount of income will be set for the rest of your life. 

That reality is that most people will receive a very poor return on their money and many will not get their money returned to them at all. Most people will receive a very poor return on their money and it is not the ‘safe’ option that people think it is….WHY???

If you die soon after buying your annuity you lose most of your pension savings.

As inflation rises, your level annuity becomes worth less and less each year.

Once you have given your money to the insurance company and bought the annuity, if your circumstances do change, your money is gone and you will not have a second chance. 

If pensioners who have bought an annuity die soon after retirement, their pension fund passes to the insurance company.

So what are the alternatives?

One of the advantages of getting help from firms such as Asia Pacific Pensions, is that we can encourage you to think about the bigger picture and point out the dangers of locking into an annuity rate at the lowest levels ever without having any chance to benefit from any increase in future interest rates or equity process.

It is relatively straight forward to invest in alternatives to conventional annuities but the extra risks must be clearly understood. The alternatives include:

Investment linked annuities

Fixed term annuities

Pension drawdown

These annuities provide potential for future income growth and have flexibility so you can change your annuity if circumstances change in the future.

2013 – The year of the Annuity Portfolio?

Finally, don’t forget, there is no reason why the normal rules of investing should not apply to annuities. That means you don’t have to put all of your eggs in one basket as you can split your annuity between different options.

Perhaps 2013 will be the year of the annuity portfolio; for instance investing in a combination of guaranteed and investment-linked options, with perhaps some drawdown if appropriate.

The above article is reproduced by Asia Pacific Pensions who can be contacted either by email at [email protected] or alternatively by telephone on either 038 074644 or 0800 178 269.
The information provided in this article is not intended to offer advice. It is based on Asia Pacific’s interpretation of the relevant law and is correct at the date of printing this article. While we believe this interpretation to be correct, we cannot guarantee it.