Unlocking retirement happiness
The hidden benefits of annuities
Retirees with annuities are more likely to report higher financial confidence and lower stress levels. But many people overlook them as a retirement income option – according to the FCA, only 10% of pension pots first accessed in 2021/22 were used to buy an annuity.
So how do you bridge that gap?
With good advice!
A recommendation from their financial adviser is the top reason people choose an annuity. According to the ABI, 36% of annuity buyers in 2024 sought financial advice beforehand, up from 29% in 2023.
Read on to find out:
• How annuities can make your clients measurably happier
• How that can strengthen your relationship with them
• The financial practicalities you can cover off
• Helping your clients layer their portfolios
• What clients often need to know about annuities
Our research into the measurable happiness that annuities bring
Our recent “Happiness in Retirement” study found that retirees with an annuity score more positively than those without one across multiple well-being measures.
Clients with a guaranteed income are:
• More satisfied with their current lives, relationships, free time and social activities
• 51% more likely to report lower levels of stress than those without one
The advantages for annuity holders go beyond wellbeing considerations to include financial management benefits.
Compared to retirees who don’t have annuities, they’re also:
• More likely to report the highest level of financial confidence (24% versus 21%)
• 27% more likely to find their finances predictable and easy to keep track of
All that’s according to some very rigorous research, conducted by us in partnership with independent Danish think tank the Happiness Research Institute.
Together we explored the lives and finances of 3,000 UK retirees. We looked in general at the connection between financial security and wellbeing in retirement, and specifically at the link between annuities and happiness.
Strengthen client relationships by helping them understand annuities
As noted above, recent FCA research shows that only one in ten pension pots first accessed in 2021/22 were used to buy an annuity. So, it’s very likely that your clients won’t have considered them in any depth.
Helping your clients understand annuities can strengthen your relationship with them. That’s because you’ll have an opportunity to show your commitment to both their specific financial and their broader personal wellbeing.
Covering all the financial practicalities
Helping your clients layer their portfolios
Annuities are an excellent way of providing a guaranteed retirement income and all the wellbeing benefits that come with it. But it’s very unlikely that they’ll be the only income solution your clients will need to support their later lives.
Lorna Shah comments: “While the benefits of an annuity can often be overlooked when it comes to retirement planning, it’s important to note they don’t have to be the only solution as they can be part of a blended approach.
“Combining the guaranteed income of an annuity with other sources, such as income from investments or drawdown, can provide even more flexibility, ensuring that essential expenses are covered, while offering the freedom to grow other assets”.
That can make annuities a good foundation for a conversation about a layered approach to retirement planning. The benefits of that kind of approach can have a very broad appeal. For example, bringing together annuity and drawdown products can give clients both flexibility and security – useful for both better-off and less affluent people.
What clients need to know about annuities
As ever, specific information needs will vary from client to client. But we’ve found that there are some general basic points it’s often useful to share.
First of all, many pension savers aren’t clear about the differences between drawdown and annuities. According to Mintel, 51% of DC pension savers aged 35+ don’t understand the difference between annuities and drawdown. That rises to 60% among 45 to 54 year olds.
Explaining those differences could be a good starting point. And there’s a clear need for financial advice to help them navigate those complex decisions. If they do opt for an annuity, they’ll have quite a few other choices to work through as well.
These can include:
• How much income the annuity will give them, for how long:
• An annuity can pay out for the rest of their lives or for a fixed term. A series of fixed term annuities can be a useful part of a blended retirement plan. Note that clients can hold more than one annuity at once.
• How often they’ll be paid and whether they’re paid in advance or in arrears
• Whether they’d like to include any death benefits, which can include:
1. An income for their spouse, civil partner or other financial dependent after they die
2. A guaranteed minimum payment period, so their annuity keeps paying out if they die during that period
3. Value protection, which pays a lump sum to a beneficiary if they die before they’ve had back the full amount they used to buy the annuity
Typically, a fixed term annuity:
• Pays income for a fixed period, usually between three and 40 years
• Offers a guaranteed maturity amount at the end of its term
• Can be a single or joint life annuity
• If it’s a joint life one, any ongoing or maturity value payments will go to a beneficiary if the client dies during its term
• Offers more flexibility than a lifetime annuity but doesn’t have the security of guaranteed regular payments for life that you get from a lifetime annuity. Lifetime annuities can also offer better rates for those with certain health or lifestyle conditions.
• Clients can cash in or transfer their plans if they’ve chosen death benefits that allow that
Next steps
To find out more about annuities or layered approaches to retirement planning, we’d suggest:
