Annuities have had a tough time over recent years.
The general dislike of this particular financial product, can probably be traced back to a time when anyone turning 75 had to buy one. Even though this rule changed many years ago, falling Annuity rates, potential miss-selling and political rhetoric (remember George Osborne’s Budget speech in 2014) have done nothing to improve the image of this most humble of financial products.
Finally, of course, we have the introduction of Pensions Freedom, designed to deliver more flexibility in retirement; a word rarely associated with Annuities.
As a reminder, an Annuity can be bought with your pension pot at any time from the age of 55. It provides a guaranteed income for you, and your spouse, if they are included, and can also provide protection against inflation.
So, in the face of negative publicity and a large range of other options, do Annuities still have a part to play in retirement planning?
Yes, we believe they do, here are some examples:
#1: A guaranteed income for life
As we previously mentioned, retirees are faced with a wide range of options when the time comes to take an income from their pension.
However, there is only one which provides a guaranteed income for life; the Annuity.
For those people who are risk averse, then an Annuity may make sense. It will provide you with a guaranteed income for the rest of your life; protection for your spouse can also be built in.
Furthermore, to protect the buying power of the Annuity inflation protection can be built in, although this is expensive and can substantially reduce the starting level of income.
#2: A guarantee that the bills are covered
For many years’ retirement meant a choice between an Annuity or Income Drawdown; which allows an income to be taken whilst the pension pot remains invested.
However, since the introduction of Pensions Freedom, it has become easier to mould your income to your needs and an Annuity potentially has a part to play.
For example, a retiree could cover essential monthly expenditure with their State Pension and Annuity; bought with part of their pension pot. A flexible income could then be taken from the remaining pension pot as and when necessary, and used to meet discretionary expenditure, which is often variable in nature.
#3: Where the ‘return’ beats other options
There’s no doubt that Annuity rates have fallen considerably over the past decade. However, there are occasions, especially if you are suffering from moderately ill-health (serious ill-health may lead you to consider whether other options are more sensible) that an Annuity can provide a relatively attractive ‘return’ or income.
Of course we need to refer to a ‘relatively’ attractive income, as rates are significantly lower than in years gone by. But, compared say to a deposit account, or indeed some investment returns, you may be surprised at the level of income an Annuity can produce.
Remember the downsides though
There are without doubt downsides to buying an Annuity.
To begin with, most Annuities can never be altered; once bought you are stuck with it, even if your circumstances change.
Furthermore, most Annuities are bought without protection against inflation; the buying power will therefore reduce over time.
Finally, buying an Annuity means you will give up access to the capital used to purchase it.
Back to the original question
Do Annuities still have a part to play?
Yes, without a doubt.
But as with any financial product, there are pros and cons to each option. Which is why taking independent financial advice is hugely important to ensure you get the right solution for your circumstances.
We are here to help and experienced in helping our clients build a financially secure retirement.
It all starts with a conversation, call Bev or Sarah on 0115 933 8433 or email info@investmentsense.co.uk
