A lack of understanding of pensions annuities is costing pensioners thousands of pounds, according to a new survey by Aviva.
Lack of understanding leads to uninformed choices by those who do not avail of financial advice as they approach retirement, choices which could have dire financial consequences, the Aviva report shows.
Almost two-thirds of over-65 couples do not take out a joint annuity, even though this option leaves an annuity income for the surviving partner, when the first partner dies. In fact, 54% of consumers over 55 do not understand what a joint life annuity is, according to Aviva.
The vast majority of those surveyed also showed a lack of understanding of how health conditions should impact on their choice of annuity.
Most believed that being obese, a smoker or heavy drinker would reduce your pension income, whereas these conditions actually increase your payout, as they are deemed likely to shorten your life expectancy (and therefore the length of the term of the payout).
Aviva estimates that 40% of people could benefit from taking an impaired or enhanced annuity, which provide a higher monthly income to those with health conditions.
Many retirees also fail to realise that they have the option not to buy an annuity at age 65, and that, by waiting if they can, their eventual annuity income will be higher. The law allows a retiree the option to postpone purchase of an annuity until age 75.
A person aged 62 with a pension pot of £29,600, for example, would realise a monthly income of £151, according to Aviva. By waiting to purchase the annuity for ten years until age 72, that person would increase this monthly income to £199.
Indeed, the basic understanding of what an annuity is and does seems lacking in over-65s, the very group who could benefit from this knowledge.
This group did not understand that purchasing an annuity with their pension savings was one route to providing themselves with a regular income. Only 4% of those in this age group rightly stated that an annuity provides an income in retirement, while the remainder of respondents believed that their income would come directly from their personal pension or company pension.
