What is an annuity?
GBPensions’ jargon buster says:
Until April 2015, this was the usual means by which a pension fund is converted into an annual income for life that is paid regardless of how long the recipient lives. They can prove poor value for those who die early, as their annuity provider pockets any surplus funds. The law has been amended to give people greater flexibility and control of their pension fund by removing the need to buy an annuity altogether.
Why might an income for life not actually be as beneficial as it initially sounds?
Prior to April 2015, most UK pension providers also sold annuities, so their retiring clients would likely also purchase annuities with them (even though better rates might be available on the open market, especially for those who had minor health issues or were smokers.) After the reforms, UK pension schemes could pay out their entire fund as a lump sum. This was a major advantage over Qualifying Recognised Overseas Pension Schemes (QROPS) – see our jargon buster extract above – which still had to pay an income for life until 2017, when the rules changed, and they too were allowed to pay the full fund.
Annuities are set for life. They do not guarantee to repay any unused lump sum on death; the annuitant typically needs to survive 20+ years before receiving back in income, the amount used to purchase the annuity in the first place, notwithstanding the payment of income tax.
One of the main reasons people transfer to a QROPS is so they do not have to purchase an annuity. However, when they retire, some people may be encouraged to purchase an “insured” income for life. This product is really similar to an annuity – and could therefore effectively wipe out the potential benefits of not having to buy an annuity in the first place!
GBPensions’ view has always been that we’d rather help our clients gain access to as much of their funds as quickly and tax efficiently as possible. We like to give our clients the power of choice – perhaps to re-invest all the monies or use a portion to pay off the mortgage.
Could it be though that some clients don’t want the responsibility of that choice? Might the idea of not having to think about their retirement fund actually be more appealing, as long as an (unspecified and unguaranteed) amount is appearing in their bank account every month?