Annuity option for retirement income remains alive

Annuity option for retirement income remains aliveBuying an annuity with your pension pot has become a less popular option during the past year, since the introduction of pension freedoms last April.

The ability to flexibly access your pension pot is a lot more appealing than exchanging a big pot of money for a fixed income for the rest of your life.

There are of course also some disadvantages associated with the flexible drawdown approach to generating income in retirement from your pension pot.

When we advise our clients on their retirement income options, we always point out the drawbacks of this more flexible approach, and where appropriate continue to recommend the annuity option as the most suitable route.

Despite the new pension freedoms introduced last year, annuities remain a popular choice for the future with one age group in the UK.

A ‘millennial’ is generally considered to be someone reaching young adulthood around the year 2000.

A major new survey by Legg Mason Global Asset Management has found that most UK millennials intend to include annuities in their retirement strategies.

Legg Mason point out that sales of annuities fell from around £2.5bn a quarter before the pension freedoms were introduced in April 2015, to as low as £990m a quarter since the rule change.

However, while older savers plan to eschew annuities, millennials are far keener on this retirement income option.

The survey found that 72% of investors age 40 or over say they do not intend to buy an annuity with their pension pot.

This compares with 84% of millennials who say they are ‘highly likely’ to consider using an annuity in retirement, despite being under no obligation to do so.

Millennials with large pools of assets (those with at least £699,000 of investable assets) are even more enthusiastic, with 92% of respondents in this category saying they are ‘highly likely’ to buy an annuity to secure an income in retirement.

Adam Gent, Head of UK Sales at Legg Mason said:

“Last year’s effective removal of the need to buy an annuity has had a huge impact on sales and our research suggests the market is unlikely to stage a significant recovery anytime soon.

“However, it is fascinating to find that younger investors, particularly those with larger pools of investable assets, are far more interested in using an annuity as part of their overall retirement strategies.

“That would imply that, while providers are likely to continue to struggle with the fallout of the pension freedoms in the short term, annuities could still have a big part to play in the UK retirement market in the coming years.”

It might be the case that millennials are too far from retirement age to fully grasp the full range of income options.

This survey might however suggest that younger savers are more risk averse than older savers, making them more likely to secure a retirement income later in life using an annuity.

Either way, the annuity as an option for generating income from a pension pot is far from dead and should always be considered carefully alongside the full range of other retirement income options.

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