15/03/18The death of Annuities has been exaggerated; Three tips for making the right choice
Annuities have undoubtedly fallen out of favour among new retirees.
Since the Pension Freedom reforms in 2015 broadened the options available when accessing pension funds, the popularity of Annuities has fallen by 75% (Source: Association of British Insurers ABI)
However, former reviews from the Financial Conduct Authority (FCA) believe this has more to do with the way pension products are marketed, rather than whether the new options are more suitable for individuals than an Annuity would be.
What is the truth?
Like many financial products, Annuities are the most suitable way to access pensions for some and are less suitable for others.
An Annuity may still be the right choice for you if:
- You want a guaranteed income for the rest of your life
- You would like to take minimal risks with your retirement income
- You want to make a single decision and be financially secure for the rest of your life
- You are not looking to leave your pension to your loved ones
If this sounds like you, an Annuity may be the right choice. However, it is advisable that you talk to a professional to determine whether there are other options which may better help you to reach your retirement goals.
Is it an either/or decision?
Due to Pension Freedoms you are free to access your pension in any of the following ways:
- Take a tax-free lump sum up to 25%
- Purchase an Annuity
- Enter Flexi-Access Drawdown (taking sums from your pension as and when)
- Leaving your pension to continue to grow, tax-free
- Mixing and matching any of the above options
This means that, even if you wanted to take some of your pension fund at the beginning of retirement, you could then choose to purchase an Annuity with the remainder. Or, you may wish to purchase an Annuity with a portion of your pension fund, whilst leaving the rest in the pot, to grow and pass on to future generations.
Finding the right Annuity
If you do decide to use your pension fund to purchase an Annuity, it’s important to find the best product for your circumstances and lifestyle needs. How do you do that?
1. Move to cash
If your pension fund is currently invested in Stocks & Shares, you need to secure its value as soon as possible. If your pension is invested, it has the potential to fall suddenly, so transfer it to a Cash pension to guarantee its current value.
2. Understand the differences
Depending on your circumstances, you may benefit from one of the following types of Annuity:
Lifetime Annuity: Possibly the most common type of Annuity. This pays a guaranteed, potentially inflation-proofed income every year until you pass away. These plans are available for both individuals and couples.
Enhanced/Impaired Life Annuity: Designed for those with ill health, such as smokers and those who have worked in dangerous conditions, this type of Annuity offers a higher annual income, based on the assumption that your life span will be shorter than the average person’s.
Investment-Linked Annuity: When you buy an Investment-Linked Annuity, your money is invested by the Annuity provider. Your Annuity will rise and fall, in line with the performance of your investments. This type of Annuity comes with risk and there is a real chance that your annual income will fall as well as rise.
Temporary Annuity: If you are only looking to spend a portion of your pension fund on an Annuity, you may opt for a temporary plan. This will pay a guaranteed income for each year it is in place, which can be up to five years.
Purchased Annuity: This is like any other type of Annuity, except it is purchased using capital which has not been accumulated in a pension, such as an ISA. You can use this money to purchase both lifetime and temporary Annuities.
3. Determine if an Enhanced Annuity could work better
If you have worked in dangerous conditions, lead an unhealthy lifestyle, or have already been diagnosed with a serious illness, you may be eligible for an Enhanced Annuity. These offer a higher income as they are based on a shorter life expectancy.
It is estimated that between 60 and 70% of people could be eligible for an Enhanced Annuity without realising it, so be sure to investigate the conditions and lifestyle they cover to see whether you could get up to 50% more income in retirement. (Source: Money Facts)
4. Shop around for the best rate
The FCA report estimated that the ability to shop around effectively would mean that:
- 80% of people could be on a better rate
- 70% of people’s health and lifestyle could have earned them a better retirement income
- The average Annuity holder could increase their income by £8,460
By taking the time to educate yourself on the options available, you should be able to find the best product available for you and your circumstances.
5. Take advice
Before purchasing an Annuity, you will need to show that you understand the decision you have made. The most effective way to ensure that you have sufficient knowledge to make an informed decision is to speak to an independent financial adviser. They will help you to determine your goals and find the retirement income plan to help you to meet them.
To discuss your retirement income options, get in touch.