Are annuities a good idea?


Feb 14, 2018
Is an annuity a good idea

Until April of 2015, there was little choice in the matter – on your retirement, up to 25% of your pension pot was able to be withdrawn as a cash lump sum and the remainder had to be used to buy an annuity. Whether or not annuities were a good idea barely came into the question.

Annuities

So, what is an annuity? Annuities are provided by insurance companies. In return for your purchase of an annuity, the provider guarantees to pay a guaranteed income, either for the remainder of your life or for a fixed number of years – the first is called a lifetime annuity and the second a temporary annuity, explains the Pensions Advisory Service.

The income is calculated on a monthly basis – but may be paid to you either monthly, quarterly or annually, in advance or in arrears.

Unlike an investment, an annuity presents no risk, since the monthly income is guaranteed for life – whatever happens to the stock market or interest rates on underlying investments. The risk is taken entirely by the insurance company – in terms of how long you live and, therefore, how long the annuity payments need to be made. For that reason, if you already have health issues and your life expectancy is compromised, you may expect to be offered a higher annuity.

Some annuities – index-linked or rising annuities – even anticipate the likely effects of inflation on the income you receive by increasing your income each year by a predetermined amount.

What’s not to like about an annuity?

If annuities are so safe and secure in offering you a lifetime income, what are the drawbacks and why have they received a bad press in the past?

A story in the financial pages of the Daily Mail on the 25th of September 2017, put its finger on one of the main reasons. Until 2015, retirees had no choice but to purchase an annuity with the proceeds of their pension pot. That lack of choice on the consumers’ parts gave providers an unhealthy monopoly, which enabled some of them to offer poor rates of return on the annuity purchased.

Liberalisation of the pension rules, however, has meant that retirees have much greater freedom of choice, with the result that more competition has re-entered the annuities market – and an even wider variation in the income rates offered on the same amount used to purchase an annuity, by someone of the same age.

When you compare annuities, the income generated each month may be your primary concern. This, in turn, is determined by your age, whether you are buying a lifetime or temporary annuity, the sum you have available, and (from the provider’s point of view) the anticipated underlying interest rates and returns on investments.

In the past, the quest for the best annuities may have been especially critical for those relying on that sole source of income in their old age. It was made so critical by the knowledge that the value of their pension was locked into a lifetime annuity which offered to opportunity for a change of mind or the chance to switch to another annuity.

Freedom of choice

These days you not only have the choice of whether or not to by an annuity, but whether to use just part of your pension pot to buy one and invest the remainder in any way you choose.

In other words, you may choose the safety and security of an annuity for some part of your pension and take your chances with the vagaries of the investment market for the remainder. What remains the same, of course, is the need to continue to compare annuities – their returns and their conditions – carefully.

If you feel that you don't have the necessary knowledge to do this why not ask the experts at Age Partnership for help? They will give you advice on your options and can compare the annuity market should you decide to go down this route - just click here and complete a few details.

Annuities

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