Last week research was published by Moneyfacts which revealed that rates on standard Annuities, which do not take into account your health, are at an all-time low.
Furthermore with gilt yields falling and Pensions Freedom reducing the number of people choosing this option, it’s worth asking, why would you buy an Annuity?
Since the Budget last year, and the announcement of Pensions Freedom, the humble Annuity has been tainted as something of a toxic product by some sections of the financial press. The reality is of course very far from the truth, here are five reasons you still might want to buy an Annuity with some or all of your pension pot.
#1: Guaranteed income for life
Probably the most popular reason for buying an Annuity is that the income it provides is guaranteed to be paid.
You never need to worry about the income coming to an end or running out of money; which is possible with other options, where the income you receive is linked to investment returns.
Beware though, if you choose a level Annuity, where the income never rises, inflation will erode the buying power of the money you receive.
#2: It’s insurance against living too long
Many people see an Annuity as an investment and to a point this is correct, but it is also an insurance policy against living too long.
The income from an Annuity is guaranteed to be paid for the rest of your life and that of your partner or spouse, should you select this option when you buy the Annuity.
This guarantee makes an Annuity a popular for risk adverse pensioners, who want to know they have a guaranteed income for the rest of their life.
Beware again though, you might get less back than the original purchase price if you die sooner than expected.
#3: Compare the ‘return’ to other risk-free options
For those people who prefer to see an Annuity as an investment, how do the rates paid compare to other risk free investments?
Providing that you stay within the limits of the Financial Services Compensation Scheme (FSCS) a savings account is a risk free investment; that is to say your capital can never be reduced.
Sure, we can only stretch the comparison so far, as there are many differences between a savings account, where you can access your Cash, and an Annuity, where you can’t. But on a simple comparison of return, the Annuity generally beats a savings account.
#4: Annuity rates can be push up, if you know how to do it
There are certain tactics you can use to push up your final Annuity rate:
- If you suffer from poor health make sure you or your adviser check the market thoroughly to confirm whether or not you qualify for an Enhanced Annuity, which will give you a higher income than a standard Annuity
- Don’t immediately dismiss the possibility of a higher rate because you are in good health, some Annuity providers will take into account certain lifestyle factors, your postcode and even the job you did and the level of education you received
- Get your adviser, or do it yourself if you prefer, to haggle over the Annuity rate. Don’t be afraid to play two Annuity providers off against each other until you are happy you’ve got the very best deal
#5: Mix and match with other solutions
Historically most people have bought an Annuity with their entire pension fund, but with Pensions Freedom now a reality, you have many more choices.
If you like the idea of a guaranteed income with a proportion of your pot, but high levels of flexibility with the rest, this is now possible.
We believe a hybrid, or ‘mix and match’ solution, will become increasingly popular, with essential expenditure covered by guaranteed income, such as the State Pension and an Annuity bought with part of a pension pot and a ‘top up’ flexible income, which is taken from the rest of the pension pot as necessary.
We’re here to help
Whilst it represented a revolution in pension planning, Pensions Freedom does not change one fundamental point:
For the right person, an Annuity is still the right option
If you are approaching retirement, or have already given up work, and are confused about how to turn your pension pot into an income, our experienced and independent advisers are here to help you.
Call Sarah or Bev today on 0115 933 8433 or email info@investmentsense.co.uk
