Advice issued on short-term annuities

01 October 2012

Older individuals who want to take measures to improve their financial situation may be tempted to look into purchasing a short-term annuity, but this product is not suitable for all consumers.

According to David Trenner, technical director with Intelligent Pensions, the independent financial advisers, he believed these plans were a good idea when he first saw them.

But he told the Financial Times that on closer inspection, he realised there are a number of risks associated with annuities of this nature and those considering a purchase of one must be careful before coming to a decision.

"You are gambling that either rates will improve or that your health will worsen. If you bought one of these plans five years ago you would be worse off unless you had developed a serious illness," Mr Trenner was quoted as saying by the news provider.

Combinations

Danny Cox, head of advice with Hargreaves Lansdown, the independent financial advisers, suggested older individuals could instead opt for a combination of lifetime annuity and drawdown.

He told the newspaper that this is "where the annuity underpins and guarantees sufficient income to meet daily needs and the drawdown provides variable income but hopefully higher than an annuity over time, albeit with greater risk".

Providers of these types of short-term annuities have responded to concerns about flexibility from consumers by introducing features including break clauses, which allow the individuals to switch to another pension or enhanced annuity if they fall ill, get married, divorce or their spouse passes away during the course of the product's lifetime.

Tom McPhail, head of pensions research at Hargreaves Lansdown, recently told the Independent that it is difficult to assess what impact on annuity rates in the UK an upcoming European directive is going to have.

Directive

The EU gender directive comes into force on December 21st and will prevent providers from using gender as one of the risk factors for a premium.

People who want to learn more about providing for their retirement could speak to the experts at Key Retirement Solutions, who will be able to offer all the specialist guidance, information and advice an individual could need to decide which is the most appropriate annuity for them to buy.