Opting for a longer guaranteed period on an annuity can help clients achieve a return on their original premium, according to analysis from Canada Life.
Last month, Financial Conduct Authority data on the retirement income market showed that 75 per cent of annuities came with guarantees attached, and people buying annuities had a strong preference for financial advice.
But Nick Flynn, retirement income director at Canada Life, said although annuities could be the "unsung hero" of retirement income, it was important to understand how different guarantee periods could help different clients.
He said: "Annuities are the unsung hero of retirement income guarantee options should not be discounted in favour of maximising income.
“While the shortest guarantee periods are chosen as the norm due to the higher incomes available, the longer guarantees effectively offering your ‘money-back’ shouldn’t be ignored, given the way the annuity market has evolved and rates improved over the past 18-months."
Data from Canada Life on the various financial benefits attached to different guarantee period lengths showed that by choosing the right length of guarantee and shape of annuity at the outset, annuities could return not only the original purchase value, but also a significant return on their original premium.
The table below shows the financial benefits of different types of guarantee periods and the potential death benefits attached.
The data analysed Canada Life benchmark annuity rates over time, £100,000 purchase price, 10-year guarantee, no health or lifestyle factors. The 15-year gilt yields were sourced from ft.com.
Annuity option | Single Life – no guarantee | Single Life – 5 year guarantee | Single Life – 10 year guarantee | Single Life – 20 year guarantee | Single Life – 30 year guarantee | Joint Life – 50% spouse | Joint Life – 100% spouse | Single Life – 50% value protection | Single Life – 100% value protection |
Annual income | £6,395 | £6,386 | £6,354 | £6,143 | £5,762 | £6,389 | £6,251 | £5,822 | £6,104 |
Max death benefit | Nil | £31,932 | £63,547 | £122,860 | £172,861 | £3,194 per annum | £6,251 per annum | £50,000 | £100,000 |
Source: Canada Life annuity rates as at 16.04.2024, purchase price of £100,000 at age 65.
The analysis looks at a 30-year guarantee, which is the longest period available, and shows a return of 73 per cent on the original purchase price from the annuity, plus the original capital back.
Selecting this option would reduce the annual income by £633 but would guarantee at least £172,861 from a £100,000 purchase price, whatever happens to the customer.
Selecting a shorter annuity guarantee period, for example, 20 years, would reduce the annual income by £252 but would deliver at least £122,860 to the customer, or the estate of the customer.
Canada Life is therefore calling for wider consideration of the various options available around death benefits from annuities, as although the latest FCA data showed around three out of four annuities sold come with guarantees attached, most are much shorter guarantee periods, typically five or 10 years.
According to the table above, the difference in income was negligible between no guarantee options and choosing a five year guarantee - £9 a year in this example.
simoney.kyriakou@ft.com
