‘More needs to be done to help retirees make the most of their savings’
Older people aren’t always getting the most from their retirement savings, according to a new report, by Jackie Wells for the International Longevity Centre.
The recent historical low in interest rates has highlighted that some retirees rely on their savings for income and are exposed to interest rate risk. For many pensioners in the UK, perhaps especially those with relatively modest savings held in bank or building society accounts, recent economic events have created uncertainty and for some, real financial difficulty.
Not only have many seen their income from savings fall to unexpectedly low levels but some have faced the fear of losing their money as banks around the world face difficulties or even collapse. In maintaining levels of income, some pensioners may now be eroding their capital.
In the context of these issues, ILC-UK are today publishing “Time to Annuitise”, which explores the case for Purchased Life Annuities (PLA). The report highlights that:
Older people are living on low incomes: The typical (median) retired household has a total net income (after tax) of just under £13,000 p.a. In other words, half of pensioner households survive on less than this. The bottom 10% of retired households survive on less than £8,000p.a. and the majority (75%) of retired households has a net income of less than £20,000.
But many older people have and do use their savings to provide a retirement income: Around six million retirees depend on interest from savings for at least a part of their retirement income. One quarter of the retired (or around three million individuals) has savings and investments of more than £25,000.
Older people aren’t necessarily using savings wisely: Half a million individuals with savings of £10,000 or less have all of their savings and investments in equity-based investments rather than in cash deposits. At the same time it can be difficult for older people to choose the product which is likely to give the best return. And many older people with savings are living on a low income and not making the most of their money.
And there are many asset rich, income poor, pensioners: There are many pensioners with assets of over £25,000 who have incomes which may not sustain a comfortable lifestyle. Many in this group live on limited incomes and might be categorised as ‘asset rich, income poor’.
- There could be a role for a wider range of options for decumulation of assets including a bigger role for purchased life annuities: PLA could play a key role in ensuring older people have a stable income in retirement (and could also result in a higher income in retirement). Without property taken into account, our analysis suggests that the PLA market might benefit up to 1.3 million individuals. Yet, less than 160,000 life annuities are in force with the number of policies having fallen by 65% in 10 years and new business in 2008 amounted to fewer than 1000 sales of life annuities.
Yet, as the report argues, there are a series of barriers which make it difficult for people to access all of the appropriate options for the decumulation of retirement saving including: Low awareness and understanding; poor incentives for providers and advisers and a lack of access to information and advice.
In the report, ILC-UK call for:
- More initiatives to make it easier for consumers to find out about the income options and to help them purchase the most appropriate products
- More promotion of annuities by the industry and the FSA
- Consideration given to changes to the tax legislation for annuities
- More emphasis in industry, Government and FSA material on the risks posed by different options in retirement
- Life annuities forming a core part of the information and guidance given to those in retirement
Baroness Sally Greengross, Chief Executive of ILC-UK said “This report shows that there is a group of the population with assets at retirement who may not be getting the best return on those assets. It is vital that industry, Government and consumer groups work together to ensure that older people do have access to the financial services they need. Its all about Access, Access, Access. If we get it right it could be a win-win for both industry and older people”.
Jackie Wells, ILC-UK Associate Fellow and author of the report added “Annuities have had a bad press in recent years and life annuities in particular have fallen out of favour. But with interest rates at an all time low and predicted by many to stay low for some time, perhaps the time has come to reinvestigate the benefits that these unique products offer to those in later life.”
To view "Time to Annuitise" click here.
"Time to Annuitise" was discussed at a recent ILC-UK and Actuarial Profession Joint Event: "Decumulation of Assets -The Impact of the Economic Downturn". Presentations from this event can be downloaded here.
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