04 October 2018

Challenging perceptions on annuities

How do you define ‘good value’?  

Annuities have suffered from a poor perception of value over the past few years and yet, consumers who are familiar with annuities consider them to be good value.

Why is this?

Our recent survey of more than 2,000 over-55s highlighted that financial security is the primary focus for those coming up to, and in, retirement. 52% of people interviewed said that financial security is the most important thing to them in retirement, followed by 29% who cited a guaranteed income as most important.

Coupled with the evidence that 72% of consumers surveyed don’t like taking risks with their money and an even higher proportion (77%) wouldn’t risk their retirement income, even if a higher return was possible, then we begin to see that many of those nearing or in retirement don’t want to take any risks with what they view as their future income.

This attitude and thinking underlines decision-making at the point consumers need to plan for their retirement. As annuities can provide the financial security many retirees require, clients need help to understand how they can form an important part of their retirement funding.

Annuity returns and the perception of value

When asked what they'd consider a good annual rate of return on savings or investments, two-fifths of respondents said between 3% and 7% would represent ‘good value’.

Worryingly, over a fifth of those questioned had no idea what a good rate of return would be, and three quarters didn't understand the benefits of enhanced annuities. This lack of understanding about annuities is understandable when we see that the results showed the majority of respondents spent less than an hour a week managing their retirement finances. In fact, we found that consumers were likely to spend more time considering buying a new car or re-modelling a bathroom than choosing how they access their pension pot and understanding which products represented good value.

The ‘will it last?’ worry

The research also found that most consumers had, at some point, felt concerned that their funds wouldn’t last in retirement. Less than a third (30%) said they had never worried about their retirement money running out early and nearly one in five (19%) weren't confident that their pension pot would last. In particular, women and those in the pre-retirement age group were especially concerned that their pension savings wouldn’t last. Figures rose dramatically to nearly 50% of women considering that their money may run out too early in retirement and over 50% of 55-64 year olds.

Recognising the value of annuities to consumers

So, the perception of value is more complicated than just cost. Annuities address many of the financial concerns of consumers in retirement. They improve financial security with a guaranteed income, they can last a lifetime, so consumers won’t run out of money and they provide the level of return that consumers regard as good value. Please also remember pension annuities don’t have a ‘cash-in’ value and the total income paid from your client’s annuity could be less than the amount they used to buy it.

Our concern is that too few people understand just how annuities work and the benefits they provide. As Emma Byron, Managing Director, Retail Retirement Income, Legal & General Retail Retirement, comments:

Our research shows that annuities clearly have the potential to meet the needs of retirees who really just want to know whether they can afford the retirement they want. But all of us in our sector need to make sure that planning for retirement and choosing how we access our pension is clearer and hassle-free.
Emma Byron, Managing Director, Retail Retirement Income, Legal & General Retail Retirement

'We think part of that work includes speaking clearly to our customers, without jargon, to really show the benefits that retirement income products can bring to retirement. This is something we’re working to improve at Legal & General, and which we believe will work hand-in-hand with financial advice to help more people enjoy the retirement they’ve worked hard for.'

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