In the Partnership sponsored paper, Billy Burrows - an associate director of Key Retirement and director of his own consultancy business Retirement Intelligence - argues why annuities will continue to play an important role in retirement income planning. Looking to the future, he suggests that innovation, a more sophisticated use of these products, deeper understanding of behavioural issues and an increase in personal underwriting will further increase their attractiveness.
With mortality drag being arguably one of the least understood aspects of annuities, Billy provides the first comprehensive review of it in relation to enhanced annuities, describing it as being like an invisible force that provides an important boost to annuity payments and consequently makes it harder for drawdown policies to provide the same level of income without the investor taking undue risk.
Essentially, when someone buys an annuity, they benefit from the mortality cross-subsidy, i.e. those who die before their normal life expectancy subsidises those who live longer, but those who invest in a drawdown plan don’t benefit from this mortality cross-subsidy.
Billy Burrows commented:
“It is important to separate the benefits of annuitisation from the poor image associated with some annuity policies. The case for annuities can be made strongly on a number of fronts when the benefits such as a guaranteed income for life are examined and the outcomes compared to products such as drawdown. Annuities, especially enhanced, are hard to beat when compared to drawdown. The investment returns required to maintain the annuity purchasing power increase with age and this is the time when investors should be taking less risk not more.”
Andrew Megson, Managing Director of Retirement at Partnership, added:
“As an enhanced annuity provider, we are obviously convinced of the benefit of our products but we felt it was important for them to be analysed by analysed by a well-respected independent commentator. This is a report that advisers and consumers can use to fully understand when and why annuitisation makes sense. Mortality drag is one of the least understood aspects of annuities and this paper helps to explain this phenomenon as well as clearly highlights where and why annuities still have an important place and are beneficial for many retirees.”
