After years in the doldrums annuities are taking centre stage once more with recent industry data showing sales had soared to a 10-year high. It’s a dramatic return to favour for a market that has been criticised in recent years for offering poor value for money and for being inflexible.
An annuity is a retirement income product where you give your pension pot to an insurer in return for a guaranteed income for life.
This certainty can be all important in helping retirees plan their income long-term and for a long time they were the main retirement income product.
However, a sustained period of low interest rates and depressed bond yields meant the incomes on offer were pretty low and so they came in for a lot of criticism.
Things changed in the 2014 budget, when the Freedom and Choice pension reforms ushered in some changes. Retirees could take their pensions as cash if they wished and the income drawdown market — once the preserve of wealthier retirees — was opened up.
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The upshot was that no-one had to buy an annuity — so in many cases they didn’t, and the market shrunk.
However, the rising interest rates we’ve seen in recent years have revived the market. The latest data from Hargreaves Lansdown’s annuity search engine shows a 65-year-old with a £100,000 pension can get an income of up to £7,490 per year from a single life level annuity with a five-year guarantee. This is a marked uplift from the £5,167 they would have got three years ago.
The first thing to remember is that once bought, an annuity cannot be unwound, so it pays to take the time to get the best type of annuity for your needs.
Different providers offer different rates and so opting for the first one offered could be an expensive mistake. Using an annuity search engine to look across the market is a great way of seeing what else is out there.
It’s also important not to just opt for the highest income — this is often a single life annuity. That’s fine if you are single but if you are married your partner could be left with nothing when you die.
Read more: How to get tax relief on your pension contributions
Other important factors include being upfront about your health. We may stretch the truth about our unhealthy habits when we sit in front of a doctor but when it comes to annuities it pays to tell the truth. Including information on how much you smoke, or drink could get you an income uplift. If you have developed a condition such as diabetes or had a stroke, then you could qualify for an enhanced annuity which gives you more.
