Lowes Magazine 117

ANNUITIES

INVESTING

Is there a case for annuities in 2021?

Trending today

ANNUITY SALES FELL OFF A CLIFF WITH THE announcement of the pensions freedoms in 2014 and have never recovered. The reason is the flexibility around accessing pensions now post age 55, such as through income drawdown, and also the death benefits, which enable the passing on of a pension to a named beneficiary or beneficiaries – without a tax charge if the pension holder dies under the age of 75. Also, pensions sit outside an individual’s estate for inheritance tax purposes. The main benefit of annuities is that they provide a regular income for life. However, that amount is set at the time the annuity is purchased and annuity rates have been very low for the past 20 years. In addition, unless a joint annuity is held, often annuity payments cease with the death of the annuity holder and are not passed on to any beneficiaries. There are many different types of annuity, from single life or joint life, through inflation-linked and guaranteed annuities, to those for people who smoke or are in ill health.

ESG HAS BECOME A GROWING TOPIC OF DISCUSSION and a focal point for the investment industry over the past year. Standing for Environmental, Social and Governance, it is an investment strategy that looks at the sustainability and social impact of investing in companies – it is also known as socially responsible investing (SRI). The strategy avoids companies engaged in areas such as tobacco, fossil fuels and so on and also looks at how a company is being run, which will include things like its impact on climate change through energy efficiencies and the materials used in its production processes, its overall effect on the environment, how it treats its employees and how it makes its profits. In many ways it is a more progressive investment strategy to the ethical/green ones of the past which tended to simply exclude what were termed ‘sin’ stocks, such as alcohol, pornography and arms. While typically these will be excluded from an ESG or sustainable fund, now fund managers are looking for companies also that are trying to positively affect the world. Sustainable fund managers often are keen to help companies improve their ESG standing rather than avoid investing in them altogether. Not only is ESG investment growing as a movement amongst consumer-focussed funds but pension companies are under pressure from their members and also the government to invest responsibly, as the UK heads towards its commitment to zero net emissions of greenhouse gases by 2050. This is both raising the profile of ESG and showing the path for companies to follow. Performance One of the criticisms of ethical/green funds in the past is that by excluding high performing areas, such as tobacco and oil, they were destined to underperform the market. So often there was a performance impact for making an ethical choice. However, as investment funds have started to become more active in the areas of ESG and sustainability, this has changed. Fund managers such as Fidelity have commented: “In 2020, we saw how companies that took environmental, social and governance issues seriously going into the [Coronavirus] crisis,

Rates typically are presented as a percentage of £100,000 per year with basic and enhanced annuities usually paying the highest rates. Since pensions freedoms, data shows that the vast majority of people have been opting for income drawdown. This keeps the money in control of the individual, who is able to invest it in the way that they want and pass it on to their beneficiaries. Occasionally we see media stories around increased sales of annuities – particularly when stockmarkets have fallen and a regular income albeit a low one may look more attractive – but they have been very small percentage sales increases. While annuities may be right for people in particular circumstances, due to their restrictions and current low rates, in general, the current market is tending towards the flexibility and options that come with drawdown solutions. We assess clients’ individual needs and will advise accordingly, to ensure our clients get the best outcome for their own set of circumstances.

outperformed those that didn’t, both during periods of market volatility and relative calm.” Likewise, recent data shows that in the tough UK market last year, ESG focussed funds tended to outperform their non-ESG peers. Over time, however, they are expected to perform on par. Virtuous circle There are sound reasons for companies to commit to ESG principles, because the more they do the right thing, the more they attract stable capital flows, which leads to better outcomes for the company, its investors, and for society. Likewise, the more investment managers start questioning companies in which they are looking to invest about their ESG credentials, the more companies will be encouraged to commit to sustainability. Another driving force towards ESG recognised by the industry is that younger investors are taking greater interest in where their money is invested, notably that it is supporting positive change globally and not doing environmental or social harm. This ESG groundswell from the industry’s future investors also has helped focus asset managers’ minds on ensuring their funds are committed to ESG principles. Something to be aware of is that not all ESG/sustainable funds are created equal. Some funds are being badged ESG but do not fully meet ESG credentials. Careful research and selection is essential. According to latest figures from the UK’s Investment Association, over £7 billion went into responsibly invested funds in the first three quarters of 2020, up from around £2 billion in 2019. Those figures clearly show the growing interest of this investment strategy to investors and that it is not just a fly-by-night ‘trend’. As such, we can expect to see greater availability of funds in the market.

Annuity rates for 65-year-old per £100,000

Annuity Type

Single Life £4,584.12 £4,526.64 £2,544.12 £2,518.92

Joint Life £4,187.08 £4,176.05 £2,266.32 £2,255.76

Single Life (Smoker)

Joint Life (Smoker)

No Guarantee, Level

£5,177.76 £5,041.68 £2,950.32 £2,895.00

£4,643.88 £4,597.08 £2,481.00 £2,450.88

10 Year Guarantee Level

No Guarantee, RPI

10 year guarantee, RPI

Fixed Term annuity 20 years

£5,351 – this is would pay the same value as the return is calculated based on capital value and term, this would provide no maturity value, funds would pay to clients estate on death before end of the term.

Notes: Smoker at age 65, smoking 20 a day since age 18, but with no additional medical information. A person’s height, weight and postcode can all impact the annuity rate as these can impact life expectancy.

Pensions freedoms Anouncing the Pensions Freedoms in the 2014, then Chancellor of the Exchequer George Osborne declared they were the “biggest changes to pensions in 100 years”, where “no-one will have to buy an annuity”.

If you are interested in learning more about responsible investments please talk to your Lowes Consultant or call 0191 281 8811.

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13 Lowes.co.uk

12 Lowes.co.uk