Written By Coreena Dutton
Whilst many investors think about the long-term strategy of their pension and other investments, and the recent market volatility as being part of that cycle, others with a shorter investment timeline ahead who rely on their pension to provide an income in retirement may be more affected by the immediate economic climate.
Annuity purchase used to be the only real option for pension investors if they wanted to take an income from their pension, as there was little else out there to choose from. However, since the pension freedom rules changed in 2015, a lot of people made the most of accessing their pension pots flexibly rather than committing to an annuity purchase.
Since then, we were used to seeing interest rates at all-time lows, and this typically means that annuity rates are less attractive, along with other factors. Therefore, flexible drawdown was the only feasible option for most people.
However, with the higher interest rates we are now seeing, this would usually indicate higher annuity rates as a result, offering for some what is a ‘window of opportunity’.
For example, one of my clients recently purchased a fixed-term annuity offering in excess of 5.5% income per annum for 10 years, with a lump sum of over 87% of the original payment returned in 10 years’ time. These rates are based on age, health, amount invested and options available at the time, so differ for everyone, but it seems that now is a good time to consider a guaranteed income if one is required.
Many of my clients are considering using part of their pension pot to buy an annuity, and leaving the rest in drawdown, giving them a guaranteed income whilst still being a little flexible. On the other hand, however, I have others who are choosing to use their entire pot for an annuity purchase, to give them the peace of mind they require.
Understanding the options available based on your own personal circumstances is an important first step to take. So, what are some of the options when it comes to annuities?
Lifetime Annuities
A lifetime annuity is an insurance product that allows you to swap all or some of your pension savings for a guaranteed regular income that will last for the rest of your life. How much you get is determined by the rate that the individual annuity provider offers.
People who have serious health problems should be offered a higher rate than someone who is likely to live for many years. The insurer is essentially taking a bet that they will not end up paying out more than the total pot.
Fixed Term Annuities
A fixed-term annuity is a retirement product that pays a guaranteed income for a set period of time. If, for example, you are looking for a guaranteed income but do not want to make a lifelong commitment with your pension savings, then a fixed-term annuity could be for you.
Some fixed-term annuities offer a guaranteed lump sum at the end of the fixed term, and some do not. It can be a great way to guarantee a certain level of income for a set period of time, with added flexibility at the end of the chosen term for some products.
Care Annuities
An immediate needs annuity can provide a guaranteed monthly payment for life to help pay for care fees. In exchange for a single premium, an immediate needs annuity pays a monthly payment to the individual’s UK registered care provider for the rest of their life.
To help you understand how annuities work and which option might be best for you, the key really is to consult with an Independent Financial Adviser to assess your individual circumstances. Please do not hesitate to get in touch if you would like to speak to a member of our team on 0117 450 1300.
Written By Coreena Dutton
