31 October 2009
The recent historical low in interest rates has highlighted that some retirees rely on their savings for income and are exposed to interest rate risk. For many pensioners in the UK, perhaps especially those with relatively modest savings held in bank or building society accounts, recent economic events have created uncertainty and for some, real financial difficulty.
Not only have many seen their income from savings fall to unexpectedly low levels but some have faced the fear of losing their money as banks around the world face difficulties or even collapse. In maintaining levels of income, some pensioners may now be eroding their capital.
In the context of these issues, ILC-UK are today publishing “Time to Annuitise”, which explores the case for Purchased Life Annuities (PLA). The report highlights that:
• Older people are living on low incomes: The typical (median) retired household has a total net income (after tax) of just under £13,000 p.a. In other words, half of pensioner households survive on less than this. The bottom 10% of retired households survive on less than £8,000p.a. and the majority (75%) of retired households has a net income of less than £20,000.
• But many older people have and do use their savings to provide a retirement income: Around six million retirees depend on interest from savings for at least a part of their retirement income. One quarter of the retired (or around three million individuals) has savings and investments of more than £25,000
• Older people aren’t necessarily using savings wisely: Half a million individuals with savings of £10,000 or less have all of their savings and investments in equity-based investments rather than in cash deposits. At the same time it can be difficult for older people to choose the product which is likely to give the best return. And many older people with savings are living on a low income and not making the most of their money.
• And there are many asset rich, income poor, pensioners. There are many pensioners with assets of over £25,000 who have incomes which may not sustain a comfortable lifestyle. Many in this group live on limited incomes and might be categorised as ‘asset rich, income poor’.
• There could be a role for a wider range of options for decumulation of assets including a bigger role for purchased life annuities: PLA could play a key role in ensuring older people have a stable income in retirement (and could also result in a higher income in retirement). Without property taken into account, our analysis suggests that the PLA market might benefit up to 1.3 million individuals. Yet, less than 160,000 life annuities are in force with the number of policies having fallen by 65% in 10 years and new business in 2008 amounted to fewer than 1000 sales of life annuities.
Yet, as the report argues, there are a series of barriers which make it difficult for people to access all of the appropriate options for the decumulation of retirement saving including: Low awareness and understanding; poor incentives for providers and advisers and a lack of access to information and advice.
In the report, ILC-UK call for:
• More initiatives to make it easier for consumers to find out about the income options and to help them purchase the most appropriate products
• More promotion of annuities by the industry and the FSA
• Consideration given to changes to the tax legislation for annuities
• More emphasis in industry, Government and FSA material on the risks posed by different options in retirement
• Life annuities forming a core part of the information and guidance given to those in retirement.
"Time to Annuitise" was discussed at a recent ILC-UK and Actuarial Profession Joint Event: "Decumulation of Assets -The Impact of the Economic Downturn".