THE combination of stock market uncertainty and rising interest rates mean annuities are now looking increasingly attractive to retirees.
Last year, the average annuity purchase reached a record £84,000, according to The Association of British Insurers.
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Over the last decade, the majority of retirees have chosen to leave their pension invested and use drawdown to make withdrawals as and when they need income.
But while pension drawdown gives you flexibility and the potential for further growth, it’s not a stress-free solution.
If stock markets fall, your pension will shrink and you might need to reduce your income.
And, if you don’t manage withdrawals carefully, you could – potentially – run out of cash.
Annuities, on the other hand, offer income certainty for retirees and rising interest rates mean you might be pleasantly surprised by the income they pay.
Get paid every month, whatever happens to the stock market
An annuity provides you with a ‘pay cheque’ for life.
Whatever happens to the stock market, you can be confident that your income will be paid, no matter how long you live.
Once your annuity is set up – in exchange for all or part of your pension – you will know just how much money you’ll be paid each year.
That reassurance is priceless; you’ll be confident that you’ve got money to pay for essentials like food and fuel bills, without worrying about stock market volatility.
And annuities may be more flexible than you think too.
For example, if you’re married or have a partner, you can make arrangements for income to be paid to them, if you die first.
If you’re concerned about rising costs, you can also choose an inflation-linked annuity, with payments that increase each year.
Many retirees will, understandably, worry that they won’t get any money back when they die.
But, you can guarantee payments for a period, or add in value protection, that pays a lump sum to your loved ones, after you’ve passed away.
You can’t, however, reverse a lifetime annuity (after the initial cooling-off period).
That means it’s important to take the time to understand how they work and consider your overall finances first.
The short-term alternative
A lifetime annuity is undoubtedly a big commitment – especially if you’ve only just retired.
But if you’re not quite ready to take that step, you could consider a fixed-term annuity.
These annuities pay a guaranteed income for your chosen number of years – usually between three and 10 years.
At the end of that period, you’ll get a guaranteed lump sum back and you’re free to decide what to do next.
Think of it like a half-way house between pension drawdown and a regular, lifetime annuity: you’re protecting your wealth from stock market volatility and benefiting from guaranteed income, but you’re still keeping your long-term options open.
The right time to buy
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When you buy an annuity, timing matters: you’ll want your pension to look as healthy as possible and rates to be competitive.
The bigger your pension and the higher the rates at the time of your purchase, the better the income you’ll get.
And right now the timing is looking pretty good.
After stock market losses earlier this year, many people’s pots have recovered, meaning they now have a bigger pension than they did.
Not only that, but annuity rates are at a historically competitive levels.
Together, these circumstances provide retirees with a timely opportunity to:
- Lock in a higher level of guaranteed income than previous years
- Protect lifelong savings from future stock market falls
- Build a stress-free retirement income plan
It is, of course, impossible to predict the ‘best’ time to buy an annuity.
But, finding out what you could get today will give you information to work with and the confidence you need to take the next step.
Annuities and drawdown: the best of both worlds
If you like the idea of guaranteed income, but still want to benefit from further investment growth, you could use a combination of annuities and drawdown in retirement.
This could give you the best of both worlds.
For example, you could secure enough guaranteed income to pay for essentials and leave the rest invested.
This would provide a separate pot to cover bigger expenses like holidays, or help you manage rising costs in the future.
What’s right for you will depend on the income you need, your health and your attitude to risk, not to mention your own personal plans.
Think first
Annuities can deliver priceless peace of mind for many retirees. But they won’t be the right call for everyone.
Before you commit, it’s important to know that….
- Annuities cannot be cashed in if you change your mind.
- The exact income you receive will depend on your age, your state of health and the options you select. Extra benefits like payment guarantees or protection for a partner will all reduce the income you receive.
- If you don’t select any guarantees, your loved ones won’t get any money back when you die.
- Pension drawdown is more flexible and gives you greater control over your income. You can also leave remaining funds to beneficiaries when you die. However, the risks are higher.
To make the right choice for you, it’s important that you understand all of the options that are available to you – and get professional guidance if you’d benefit from a little extra support.
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