The significant improvement in annuity rates over the past 12 months has also had a positive impact on the cost of guarantees, according to research from Canada Life.
It said the margin between no guarantee and a 20-year guarantee is just a 4 per cent reduction in annual income, with a £100,000 annuity securing an income of £6,532 versus £6,270, a reduction of £262 a year.
The 20-year guarantee will return income of at least £125,400, irrespective of what happens to the customer.
Nick Flynn, retirement income director at Canada Life, said: “As annuity rates have improved so has the cost of the death benefits available. No longer do clients need to trade off a big drop in income to provide valuable guarantees.
“The reduction in income from choosing a longer guarantee period which effectively provides a ‘money-back’ guarantee, is now so narrow as to cost peanuts, so it’s completely bonkers not to consider some guarantees to provide additional certainty.”
How the costs compare - £100,000 purchase price
Guarantee period, (to cover early death) | Annual Income, payable for life | Minimum Guaranteed income | Change in annual income to provide additional protection |
None | £6,532 |
|
|
5 years | £6,522 | £32,610 | - £10 |
10 years | £6,489 | £64,890 | - £43 |
20 years | £6,270 | £125,400 | - £262 |
30 years | £5,879 | £176,370 | - £653 |
50 per cent value protection | £6,505 | £50,000 | - £27 |
100 per cent value protection | £6,388 | £100,000 | - £144 |
Source: Canada Life annuity rates as at 11/04/2023. Healthy life aged 65, average postcode
Flynn added: “Now one of the biggest barriers to annuities, ‘I won’t get my money back if I die early’, can really be challenged and guaranteed periods need to be explored.
“People considering annuities as part of their retirement income plan should seek the help and support of a specialist broker or regulated financial adviser. That will help ensure all options are considered in the rounds before making any irreversible decisions.”
Annuity guarantees in practice
Canada Life outlined how the annuity guarantee choices work in practice.
There is the no guarantees option which is that immediately on the death of the customer, the income stops.
Spouse benefits is another where a customer can choose to pay anywhere between 0 and 100 per cent of the original annuity income to a spouse, subject to a reduction in income. Upon the death of the spouse, the income stops.
Other options include:
- Guaranteed periods: A customer can opt for any income guarantee period between 1 year and 30 years, again, subject to a reduction in the income received. In the event of the death of the customer, the income will continue to be paid to a spouse or beneficiary for the remaining guarantee period.
- Value Protection (VP): A customer can choose to protect the capital purchase value of the annuity, up to 100 per cent again, subject to a reduction in annual income. Upon the death of the customer, the difference between income received to date and the ‘value protected’ amount is paid to the spouse or beneficiary, in the form of ongoing income or the value can be commuted as a lump sum.
Source: Canada Life annuity rates over time, as at April 1, 2023
sonia.rach@ft.com
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