Last time I wrote about the fictional finances of a plastic doll, Barbie was 60 and consolidating 200 pension pots from her varied portfolio career since she first appeared in 1959. Now she’s 64 — though eternally youthful — and has a new movie out, she is old enough to worry about whether to buy an annuity.
If, like the blonde bombshell, you’ve had a later life surge in prosperity, you’ll be pleased that the problem of the lifetime allowance on pension contributions has disappeared after the government scrapped the limit. You may also be happy to reach retirement age when annuity rates at up to 7 per cent look more in line with the long-term average returns from equities.
So does that make annuities “sexy” enough for Barbie and others to consider, as they approach retirement age?
Buying an annuity policy means exchanging a pension pot for guaranteed income from an insurer for as long as you live. Alternatively, you can use a pension drawdown plan, which involves taking regular or ad hoc income withdrawals directly from the pension pot, while leaving it invested.
Annuities may look more attractive because recent stock market wobbles have made drawdown feel riskier. Plus, in today’s uncertain world, peace of mind and financial security may feel like a good thing.
But even before pension freedoms were introduced in 2015, removing any compulsion to buy one, annuities were unpopular because the income they generated was so low. That’s now improved, with a single 65-year-old with £100,000 being able to buy a level income — one that stays the same each year — of £7,210, which is guaranteed to be paid out for 5 years, even if you die in the interim, according to investment platform Hargreaves Lansdown.
And Barbie in her latest outing reveals she is now worried about dying. Had she put her age into National Life Tables at gov.uk, she would find that as a 64-year-old female she has on average 21.81 years left to live, taking her almost to 86. That’s based on the latest available data from 2018-20.
If she could do the maths (a Barbie doll released in 1992 said “math class is tough”) she might calculate that if she bought the level annuity and lived that long, she would get back £158,000 in income to fund her retirement Dream Home lifestyle.
So it’s perhaps no surprise that insurance companies are reporting much bigger sales of annuities. Just Group, which said sales of individual guaranteed income products were up 54 per cent year on year, thinks the incoming consumer duty rules requiring firms to demonstrate good outcomes for customers will push more financial advisers to recommend annuities for older customers.
Sorry, Barbie, that’s you, even if you still look 22. However, although advisers say the higher rates mean annuities are back on the table, they’re still a long way from “no brainer” territory.
Ian Millward of Candid Financial Advice says: “Rates have improved significantly — up about 40 per cent from the start of last year. But that’s still from an exceptionally low base. We run annuity quotes at annual review for all clients taking pension income and while there is definitely more interest, nearly all opt to stay in drawdown.”
It will always be a gamble to buy an annuity over taking an income directly from your pension investments. That’s because you don’t know when you’ll die, or how the stock market will perform or how inflation will rise over the time you have left.
An argument against buying a level annuity is it could be fast eroded by rising prices. Unfortunately, the rates for inflation-proofed annuity products, that typically increase in line with Retail Prices Index inflation, still aren’t that attractive.
If you wanted RPI inflation protection built into the single life annuity guaranteed for five years, the starting amount paid out on £100,000 falls to just £4,602.
There’s also no income flexibility with annuities — which won’t work if Barbie plans to spend on fabulous holidays with Ken and ease off later, or does more movie work that leads her income to vary. She’d have to receive the annuity income and pay tax on it whether she needs it or not.
Annuities are still off-putting for some because they do not allow the saver to leave anything to the family. That may not bother you, if like Barbie, you don’t have children.
Plus, most people pay a bit extra for annuity products that are at least guaranteed to pay out for a few years if you die straight after you buy them. You can also buy joint annuities that leave half the income to a spouse or nominated partner. That should keep Ken in matching beachwear.
However, noting that Barbie’s latest career moves include chief sustainability officer, conservation scientist and renewable energy engineer (all in a very busy 2022), she may not be pleased to discover there are no ethical, responsible or sustainable annuities.
Ultimately, annuities are backed by gilts, so she will have to take a view on how ethical loaning money to the UK government is.
What worries me is the lack of competition on the open market, with only a handful of insurers offering quotes, including Scottish Widows, L&G, Aviva and Canada Life. There’s a fair degree of variance between the quotes, but some advisers think an annuity purchase is still too expensive compared with investing your money.
James Baxter, founder of Tideway Wealth, says: “At worst it consumes your capital, at best it’s not much better than a portfolio of gilts. With the current market environment, the vast majority of people could make the same or more money with low-risk investment options, while they also have the flexibility to pass on their money to their family if they die.”
He suggests a portfolio utilising higher-yield and pure investment grade bonds, plus equity income funds, can now produce 4 per cent in investment income alone, so there would be no need to cash capital to fund this level of withdrawals.
Essentially, annuity purchase is problematic because it’s a one-way decision. “I know that sounds a bit odd, but you have to commit to a decision that is very hard to reverse, and people struggle with that,” says Millward.
So there may be no harm in her doing a bit of both — annuity to cover essential spending and drawdown for luxuries. Jason Witcombe, a financial planner at Empower Partners, says: “It doesn’t have to be one or the other. Think of annuities and drawdown as two ends of a spectrum. Where you sit on that spectrum is as much emotional as it is financial.”
If you find your health declining later in retirement, you might be able to get an “enhanced” annuity. Providers operating in that market offer higher rates than normal annuities because of shorter average life expectancy. A sobering thought — and one scarcely likely to trouble rollerblading Barbie — but advisers say this is a niche where real value can be found.