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Are annuities set for a revival?

Are annuities set for a revival?

Category: Annuities

Updated: 08/12/2014
First Published: 08/12/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Since the new pension freedoms were announced in the Budget back in March, annuities have been given a rough ride, with demand dropping off significantly. However, thanks to the latest changes announced in the Autumn Statement, it seems that annuities could be set for a revival, with annuity death benefits being brought into line with those of drawdown products.

What are the changes?

From April 2015, people holding joint annuity policies, or those with a guaranteed term, will be able to pass them on to a beneficiary tax-free if they die before the age of 75. For those who die after the age of 75, the policy beneficiary will only have to pay their marginal rate of tax on any payments, or 45% if a lump sum is taken. The rule on who could be a beneficiary has also changed. Previously, only a spouse, civil partner or financial dependent could receive the funds, but now anyone can.

These changes bring annuities into line with the abolition of the death tax on pension funds held by those under the age of 75, granting them some welcome flexibility and putting them back onto an equal footing with other pension options.

Is a revival on the cards?

The popularity of annuities was hit hard by the Budget announcement, with demand in March falling by 47.1% year-on-year. However, the changes announced by the Chancellor have opened up the opportunity for annuities to make a comeback.

Now, thanks to the changes, annuities won't be set at a distinct tax disadvantage, which may otherwise have persuaded people to opt for other forms of retirement income even if an annuity would best suit their needs. "[The changes] level the playing field between those taking their pension as an annuity compared with those who take the drawdown route," said Anthony Thomas, chairman of LITRG. As a result, "they can make an informed decision not influenced by unequal tax treatment".

This is an important shift as some retirees will still crave and need the security of an annuity, which guarantees a regular income throughout retirement. "While people may still want to use the new flexibility offered, many will also want a level of certainty and security provided by an annuity to cover at least their basic income needs," points out Andrew Tully, pensions technical director at MGM Advantage.

Conservative estimates put the number of annuities written on a joint-life basis at two million, which means that a large number of people could stand to profit from the changes. And the savings could be huge - according to estimates by Aviva, the average 60-year-old female inheritor could save up to £10,000 in tax on an annuity purchased for £38,600.

However, while the Chancellor has made significant steps towards improving the fortunes of those who opt for an annuity, not everyone will benefit from the changes. Beneficiaries of annuity policy holders who die under the age of 75 will only receive future payments tax-free if no payments had been made to them before April 2015. This means that the changes won't benefit existing cases where the policy holder has already died and instalments are already being paid.

Less flexibility is also currently being offered to policy beneficiaries where the holder dies over the age of 75. "We would like to see them receive the same tax treatment," commented Jamie Smith-Thompson, "as many will be in receipt of care or in residential care, which is often the most expensive retirement phase."

Preparing for your retirement

Pensions have certainly been bombarded of late with reforms and changes, so if you are heading towards retirement, now is the time to start getting your head around it all. If you're feeling a bit lost about all the options, check out our retirement guides for more information on different forms of retirement income.

Now that annuities could be set to revive, you may also like to find out if there is an annuity option to suit you. Check out our no-obligation annuity planner to start exploring your choices.

What next?

Read our retirement guides

Check out our annuity planner

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.