Standard Life comments: Annuity rates reach highest levels in two decades, but half of over 50s still don’t fully understand how annuities work

by | Sep 19, 2023

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  • When tested, half of over 50s (49%) who are aware of annuities say they don’t know how they work or what they do 
  •  Just 39% believe annuities are best for providing a guaranteed, stable income for life
  • Only 35% correctly answer that annuities can be used flexibly, such as in combination with drawdown
  • A quarter (24%) incorrectly believe annuities must be bought at the point of retirement
  • This comes as annuity rates have improved by 48% since January 2022*

New research from Standard Life, part of Phoenix Group, has revealed stark misunderstandings about annuities, including their usage and value. When 2,000 50+ year olds were asked about their overall knowledge of annuities, and whether 18 statements were true or false, on average, half (49%) responded ‘don’t know’ across all statements. These misunderstandings are despite the increased value offered by annuities as interest rates have risen, with annuity rateshaving improved by 20% since June 2022, and a total increase of 48% since the start of 2022*. 

When asked about their views on annuities and retirement, almost all of the over 50s surveyed (98%) confirmed income security is at least somewhat important to them, yet only two in five (39%) viewed annuities as the best option for guaranteeing an income for life. One in five (18%) incorrectly believe that with an annuity you run the risk of running out of money later in retirement, while only half (53%) identify annuities as a product that pays out for the rest of their lives. Only 41% identify annuities as helping people address the risk of outliving their savings. In practice, annuities provide a guaranteed payment that begins from the day you purchase an annuity and then continues for the whole of your life, or agreed period of time.

Top annuity misconceptions dispelled:

  1. Annuities don’t need to be bought at the point of retirement – A quarter (24%) believe annuities have to be bought at the point of retirement. However, they can be bought any point during retirement, and in fact annuity rates improve with age so it can pay to wait. 
  1. An annuity doesn’t have to be bought in full – Over one in ten (13%) incorrectly believe they have to use their whole pension pot when purchasing an annuity. In fact you can use all or part of your pension to purchase an annuity. Annuitising portions of your pension savings in stages can also help mitigate the impact of inflation by benefiting from annuity rates improving with age.
  1. An annuity does allow you to pass your savings onto to loved ones – Just 37% identify that annuities can be set up to cover the life of a surviving partner. However, annuities come with various benefit features designed to help ensure your loved ones are covered should anything happen. Value protection provides a death benefit to a customer, ensuring their investment is returned to their beneficiary (less any income taken), while purchasing a guaranteed period for up to 30 years secures a regular income for a customer’s beneficiaries or dependents if anything should happen.
  1. Annuities don’t have to be used on their own – The reality is that annuities can be used in different ways, allowing people to shape the income they receive. However, only a third (35%) correctly identify that annuities can be used flexibly, such as in combination with drawdown, and only 38% acknowledge that annuities can be purchased at different points in retirement, with different amounts. In practice, a mix and match approach, combining drawdown and an annuity, can often be a good option, providing both certainty and flexibility, with an annuity helping cover essential costs, and the remainder left accessible in drawdown. 
  1. Annuities offer good value – rates have improved by 20% in the last year, with a total increase of 48% since the start of 2022. This means that the total expected lifetime income for a woman with a £100,000 pension who bought an annuity at 65 has increased from £130,000 in June of last year to £158,000 as of June 2023 – a difference of over £28,000. The equivalent figure for a male was £117,000 to £142,000 – a difference of over £25,000.

Pete Cowell, Head of Annuities –  Individual Retirement at Standard Life, commented: “Rising interest rates have renewed interest in annuities and the role they can play in people’s retirement income, particularly given the ongoing cost-of-living crisis which has made the purchasing power of people’s income is more uncertain. These factors have helped bring in a new era for annuities and the role they can play in ensuring retirees hard earned savings go as far as possible. 

“Standard Life is excited to enter this market with our new annuity product, to help all of our customers make the most of the certainty and security offered by a guaranteed income. However, clearly lots more needs to be done to dispel the common annuity misconceptions that still exist, to ensure people understand the value of having an annuity as part of their retirement income mix.

Pete added: “Increasing awareness and understanding around annuities, how they can be used, and the benefits they can bring, will lead to better decision making around retirement so that people make the most of their pension savings. Managing retirement income doesn’t have to be a “one and done” approach and for some, a mix and match approach combing drawdown and an annuity will be a good option, with an annuity helping cover essential costs, and the remainder left accessible in drawdown. Advice and guidance are also important, to ensure that people are informed about what retirement solution best suits their needs.”


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