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?

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%.”