Before Pension Freedoms were introduced in 2015, annuities were the default choice for many people wanting to take an income in retirement.
Fast forward five years and flexible drawdown and other approaches are now much more popular. In addition, falling annuity rates mean many people are seeking alternative options to structuring their income after they stop working.
However, annuities remain an important choice for many people who want to generate a guaranteed income in their retirement. Keep reading to find out why there is still a place for annuities in retirement planning.
An introduction to annuities
An annuity is an insurance product that allows you to exchange some or all of your pension fund for a regular income. Essentially, you ‘buy’ a guaranteed pension income using the savings you have built up over your working life.
The annuity either guarantees an income for a set period or the rest of your life, and the amount you earn depends on the rate an annuity provider offers you. When offering you an annuity, an insurer takes into consideration:
- Your age
- Your life expectancy
- Your health
- What benefits you want (index-linking, spouse’s pension etc.)
Your money is then pooled with other people who have bought an annuity and you’ll receive the income until you die.
If you live for a long time, then you’ll receive a bigger share than people who die sooner. It means that if you have a serious health problem then you’re likely to be offered a higher annuity rate as it is expected that you’ll receive the income for a shorter period.
Similarly, if you’re buying an annuity at age 75, you’re likely to get a higher rate than someone buying at the age of 65 as you’ll likely have less time to draw your funds.
Annuity rates fell in 2019
One of the reasons that many people are reluctant to commit to buying an annuity is because annuity rates have fallen in recent years.
In September 2019, Which? reported that annuity rates had fallen by around 15% in 2019 alone.
In September 2019, an average 65-year-old could have bought an annual income of £4,654 using a £100,000 pension. This was down from £5,413 in January 2019, equivalent to a 14% drop.
A similar story was seen for those aged 60. At the start of 2019, someone with a £100,000 pension could buy an annual income of £4,776. By September this had dropped to £4,051 – a 15% decrease.
One of the primary reasons that annuity
rates fell in 2019 was because of a fall in gilt yields. Economic uncertainty
has meant that many investors have moved away from company shares and bonds and
into gilts as they are a ‘safe investment’. This demand for gilts has driven up
their price and caused the return they pay to fall sharply.
Annuities are great if you want a guaranteed income
When you come to make decisions regarding your retirement income, you should carefully plan your post-work life and work out how much income you need. A financial planner can help you by using tools such as cash flow modelling to work out how you will maintain the lifestyle you want in retirement.
Annuities are a great option if you want to benefit from the security of a guaranteed
income that rises with inflation for the rest of your life.
Helen Morrissey, pension specialist at Royal London, says that Generation Xers should consider using an annuity to provide them with a certain income while using drawdown to offer them some flexibility in the early years of retirement.
She says: “Traditionally retirees either went into income drawdown or bought an annuity at retirement however, we are increasingly seeing retirees use both solutions to generate a retirement income.
“For instance, they will use an annuity to underpin a level of guaranteed income that meets their day to day needs while using drawdown for supplementary income.
“You may also find that retirees initially go into income drawdown when they retire and then annuitise at a later date which means they benefit from a higher income.”
Annuities are a good option as there is no other way of getting a guaranteed income for life. They can be particularly useful later in retirement, once you have utilised flexible options and other assets to provide you with the income you need. Later in life, you may find that you simply need a guaranteed income to meet your monthly commitments.
Shop around for the best annuity
One mistake that many retirees make is to simply buy an annuity from the insurer who has provided their pension.
Consumer group Which? report that an estimated £1 billion in pension income is wasted each year by people not shopping around. Comparing rates from a range of providers could boost your pension income by 20%, so speak to a financial planner who can help you to find the most appropriate product for you.
Get in touch
Thinking about buying an annuity? Or do you need professional help to work out the best way to structure your retirement income? Get in touch. Email firstname.lastname@example.org or call us on 01785 876222.