Over-55s have never had more freedom in the way in which they can use their life savings. Changes to pension rules in 2015 mean that millions more investors have the option of keeping their pensions invested and drawing income from them, rather than exchanging them for a fixed income from annuities, which have been paying some of the worst rates since their inception. However, there are also concerns about whether retirees risk hardship in retirement if they do not opt for an annuity.
Annuities insure individuals against longevity risk – running out of money – by paying a guaranteed income until death. The longer you live, the harder that risk is to manage, and we are, on average, living longer. UK life expectancy at birth last year was 79.3 years for men and 82.9 years for women. And a man aged 65 can expect to live for another 18.6 years while a woman of that age can expect to live for another 21 years.
Investors are “systematically misjudging” how long they will live after finishing work, according to a study by the Institute for Fiscal Studies (IFS) published in January, and the single biggest reason for this is the collapse of annuity sales since 2015. “If people underestimate their survival chances, they may undervalue the guaranteed income provided by an annuity,” says David Sturrock, research economist at the IFS.