The significant improvement in annuity rates over the past 12 months have also had a positive impact on the cost of guarantees, according to research from Canada Life.
The group said the margin between no guarantee and a 20-year guarantee is just a 4% reduction in annual income, with a £100,000 annuity securing an income of £6,532 versus £6,270, a reduction of £262 a year.
Meanwhile, a 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.
Flynn said one of the biggest barriers to annuities, the worry that someone won’t get their money back if they die early, can be challenged and guaranteed annuities should be explored.
Canada Life provided a breakdown of how the annuity guarantees choices work in practice.
No guarantees: Immediately on the death of the customer, the income stops.
Spouse benefits: A customer can choose to pay anywhere between 0% and 100% of the original annuity income to a spouse, subject to a reduction in income. Upon the death of the spouse, the income stops.
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: A customer can choose to protect the capital purchase value of the annuity, up to 100%, 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.
Flynn added: “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.”
