Ignorance causes UK's over 55s to throw away millions in annuity income

Article date: 10 February 2010

  • Almost two thirds of over 65 couples don’t take out a joint annuity  
  • Two thirds don’t realise being overweight or a smoker increases annuity payouts
  • Average annuity pot is just £27,207 and average lump sum taken is £4,338

Over 8.5 million over 55s appear to be jeopardising their retirement income through a worrying level of ignorance about annuities. According to Aviva’s Real Retirement Report, the majority don’t take out joint annuities, are unaware of what affects annuity payouts and don’t even fully understand that they derive income from one. 

All these findings were revealed in this new quarterly report from the UK’s largest insurer which reviews the finances of the three ages of retirement (55-64; 65-74 and over 75) with the first issue also taking a closer look at annuities.

Market overview:
Aviva data shows that the average retiree’s pension pot is £27,207, each person taking an average lump sum of 15% or £4,338. The value of men’s (£29,600) and women’s (£21,825) pension pots are significantly different, with women – who traditionally live longer – having 26% less saved.   

The average income a woman derives from her annuity is £99 per month* and the average man derives £151. Women take out annuities on average aged 59, marginally earlier than men (62 years) but both start drawing an annuity significantly sooner than they have to by law.  However, if they held off purchasing an annuity for ten years to 69 and 72 respectively, they could get 32% (men) and 24% (women) more annual income.

Only 4% of those over 65 believe they derive an income from an annuity while 14% feel they derive an income from a personal pension and 19% from an employer pension. This is a shocking statistic and really serves to highlight the fact that most people don’t understand the role an annuity plays in retirement financing.

Significant confusion – joint life annuity:
While this product is widely available, only 29% of married people under 65 take out a joint annuity and 41% of married people over the age of 65. Aviva research shows that this is not done maliciously, but due to a serious lack of understanding – 54% of consumers over 55 do not know what a joint annuity is.  

Understanding of what a joint annuity is increases with age – over 75s (53% - understand what one is); 65-74 (51%) and 55-64 (41%). This is worrying given that most people take out an annuity between the ages of 59-62, which indicates that people may suffer "buyer’s remorse".

Significant confusion – impaired and enhanced annuities:
It is estimated that 40% of people could benefit from taking out an impaired or enhanced annuity. These annuities are available to people who have illnesses or health conditions - such as obesity - that are likely to have an impact on the length of their lives. Consequently they provide a higher than average monthly income. 

However, most retirees and pre-retirees choose standard annuities as they do not realise that health conditions could improve their annuity income. Indeed, being a smoker (33%), regularly drinking alcohol (26%), having a serious illness (35%) and being overweight (30%) were only cited as factors that could increase annuity income by a minority of respondents.

Table One: How will these factors affect your annuity payouts?

Factors

% who answered increase

% who answered decrease

Real effect on annuity payouts

Being a smoker

33

49

Increase

Regularly drinking alcohol

26

45

Increase

Living in a coastal town

15

22

Neutral

Being overweight/obese

30

48

Increase

Having parents who lived over 80

30

29

Neutral

Having children/grandchildren

14

10

Neutral

Having a pet

15

13

Neutral

Being married

25

18

Neutral

Having a serious illness

35

47

Increase

Darren Dicks, head of annuity propositions at Aviva Life, comments: “At Aviva we understand that many retirees are facing challenging times, so we want to equip them with the tools and knowledge to give them the best possible retirement. By considering their full range of assets – including pensions, investments and property – we can help people have the lifestyle they deserve in their later years.

“However, we also know from our research that many find retirement planning confusing - particularly when it comes to annuities. With legislation making it compulsory to purchase an annuity before the age of 75, it is worrying that people over 55 know so little about them. This lack of knowledge could see some people settling for a far lower income than they are entitled to or others finding that their income dries up all together when their partner dies.

“The type of annuity a person chooses can impact on their standard of living for more than 30 years so it is vital that they understand as much as they can about these products before making a choice. We seriously recommend that people research their options via a financial adviser or an annuity provider. A little knowledge could really make a difference and increase a person’s retirement income by up to 10%.”

-ends-

Download The Aviva Real Retirement Report - February 2010 (PDF 1,296KB)

Press office contacts:
Sarah Poulter
Telephone: 01904 452828                
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Louise Soulsby       
Telephone: 01904 452617                        
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The Wriglesworth Consultancy:
Lee Blackwell / Karen Butcher
Telephone: 020 7427 1400 
E-mail: k.butcher@wriglesworth.com

Notes to editors:

Annuity overview
The UK annuity market has an estimated value of £11 billion. Legislation specifies that a personal pension or employee pension should be used to purchase an annuity before the 75th birthday of the retiree. When the pension pot (or pots) is converted into an annuity, the person can choose to take up to 25% of the pension as a tax-free lump sum.  

Methodology
* Average annuity rates were derived from the rates provided by 11 providers on 28 January 2010. The standard annuity with no guarantees or escalation.

Sex

Age

Value of pension pot

Average annual

Average monthly income

Current average annuity drawn

Male

62

£29,600

£1,815

£151

Female

59

£21,825

£1,189

£99

Delayed annuity by 10 years**

Male

72

£29,600

£2,392

£199

Female

69

£21,825

£1,486

£123

£100,000 pot retirement income

Male

62

£100,000

£6,703

£558

Female

59

£100,000

£5,377

£448

** The pension pot over the ten year period is likely to have increased. However, to illustrate how age impacts on annuity payout, we have kept the pension pots identical.

All remaining data was sourced from the Aviva Real Retirement Index. This report is a definitive look at the personal finances of the UK’s over 55 population. Not only does it look at personal wealth, income sources and expenditure patterns but also track how these change in the "three ages" of retirement. In addition to the regularly data, each quarter a spotlight will be shone onto a different relevant topic with Annuities being the choice for Q1 2010. 

About Aviva
Aviva, the international savings, investments and insurance group, is the world’s fifth largest insurance group, serving 50 million customers across Europe, North America and Asia Pacific. 

In the UK, Aviva is a leading provider of life, pensions, investment, general insurance and health products to more than 20 million customers. Aviva also provides roadside assistance through RAC. Products are distributed through a number of channels including IFAs, brokers, corporate partners and direct to customers via the internet. 

Aviva's UK Insurance business has a market share of around 15%, making it the largest general insurer in the UK. The business is focused on insurance for individuals and small businesses.

Aviva's life and pensions business in the UK has a total market share of 12% and a top three position in its key markets of savings, protection, and annuities. Aviva’s news releases and a selection of images are available from the internet press centre at www.aviva.com/media.

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