Every time there are reports in the media about the woefully low annuity rates or the recently implemented pension freedoms, I wonder why there aren’t more flexible or state-backed options for annuities. As much as the pension freedoms might have kickstarted a more flexible approach to retirement planning, annuities will still have a place in many people’s financial scenario planning because the security they offer is something many people will desire in their twilight years.
Given that the companies providing the annuities are effectively profit focused organisations, the fact they still offer these products means there must be money in it for them to do so. But if they’re basing their calculations of an annuity’s viability on historic mortality data, it’s no wonder that the returns they’re expecting will be lower as we’re all supposedly living longer these days. So in order to retain their operating margins, inevitably the value of annuities to consumers falls.
What I wonder though, is why the government doesn’t offer a state-backed annuity, accepting lower returns than the incumbent organisations but basing those returns over a longer period. In doing so , they’d be able to offer individuals higher rates and make the option of an annuity a much more attractive proposition. And because the government has the comparative luxury of basing their calculations over a longer time frame, it could result in a long term revenue source for a future government.
Maybe the concept is too alien for any government, thinking about future generations – and future governments – but as a concept, I think this could definitely be a good move for both individual and the broader country finances.