Why buying an annuity is the only DC guarantee

Annuities are back in the news as values increase and sales rise

In nearly four decades of advising companies on pension schemes of every stripe, one of the biggest challenges has always been pointing out uncomfortable truths.

We’ve built a reputation for bringing plain-speaking along with our experience and, I think, this helps to ensure what we say is translated into practical application, in that a solution is put in place to address the concerns raised.

Now we’re at a time when funds held by defined contribution schemes are set to eclipse those in defined benefit pensions, it’s time to revisit some of those conversations.

A principal theme has always been the lack of any certainty offered by DC, essentially, the member carries the risk, compared to the sponsoring employer-backed promise of a guaranteed DB income in retirement.

And I think we are all familiar with the ongoing debate that the biggest issue facing those saving into DC schemes is whether or not they are putting enough away in the first place.

But a guaranteed income can still be had because of a silver lining in an otherwise storm-shadowed economic climate.

Rock-bottom interest rates and pension freedoms conspired to push annuities to the back of the “pension product” shelf for much of the last decade but the increases over the last two years or so have blown the dust off them.

And for good reason. Not only are they offering better value – their highest in 14 years – but the income they pay out in retirement is guaranteed.

Also, should the company providing them fail, the FCSC will step in, also guaranteeing the full amount for the period contracted, be that life or a set number of years.

It’s apparent that, at the least, employers, trustees and members should be considering annuities as part of the range of retirement options.

This seems to be the case, with more people buying annuities in the first quarter of this year than at any other time since autumn 2019. Interestingly, 64 per cent bought an annuity on the open market, not direct from their pension provider.

It bears repeating that members are encouraged to explore how much they can get on the open market and these figures appear to reinforce that this knowledge has taken root.

With this in mind, we have developed Pension Potential to help everyone see a clearer picture of the part annuities can play in later life. Not only does it compare every annuity on the market, (although we’re not alone in doing so) but also sketches out what drawing down from your investments might look like, cashing in your pot or a combination of some, or all, of the above. It’s also free to use for both organisations and members.

Add to this the opportunity to talk to a financial planner, should it be appropriate, and we believe we have something for workplace schemes, master trusts and individuals to understand more clearly what an annuity can offer.

*Based on a 65 year old with £100,000 pot, no health conditions, no smoking, no escalation, no joint life, no guarantee period and no value protection.
**Based on a 65 year old with £100,000 pot, type 2 diabetes, 10 cigarettes per day (regular smoker for the last 10 years), no escalation, no joint life, no guarantee period and no value protection.