The UK annuity industry has been battling critics this year after their Chancellor all but denounced using annuities in retirement. He said that most people would not need to purchase an annuity in the later years of their retirement. It seems to me that he didn’t fully do his research on annuities before making such a blanket statement. Many critics in the UK (and elsewhere) are trying to educate UK consumers about the importance of at least considering annuities for their future financial plans. In the Actuarial Post article, “Why annuities still have a place in retirement plans,” they list some of the reasons that annuities are still important in retirement planning.
There is a lot of risk when it comes to future financial planning. Annuities transfer the risk away from the individual and onto an insurance company. The Pensions Institute’s David Blake recently wrote the paper “The consequences of not having to buy an annuity” to detail the downsides of the UK annuity changes. There are some major risks that we undertake simply by getting older. Longevity risk is the risk of living longer than your money lasts. Inflation risk is the risk of inflation eating away at your money when you thought you had planned accordingly. You also take on investment risk when your money is subject to changes in the financial markets. All three of these risks can be transferred to an insurance company to secure your financial future.
We know that life expectancy has been increasing significantly since the 1800’s. The average person in their mid-60s is expected to live close to three more decades. That’s a lot of time to make your money last. Research has shown that men underestimate how long they will live by around five years and women underestimate by around three years. While their guesses are close, that is a lot of time to be out of money if you haven’t planned for a long life. In addition to the fear of running out of money, there is a concern that you will have too much money leftover at death and much of it will go to taxes. Annuities come in many different types, so it’s up to you to determine which risk or risks you want to transfer to an insurance company. Speak with an expert and at least consider annuities to help transfer your longevity risk, inflation risk and/or investment risk.