personal finance

Annuities set for a comeback


The average annuity pays almost 15 per cent more than two years ago and with the Bank of England hiking base rates earlier this month, they should rise higher.

Annuity sales collapsed as rates plunged after the financial crisis and pension freedom reforms scrapped the obligation to buy one at retirement.

Most over-55s now prefer to use their pensions as a cash machine, rather than locking into an inflexible lifetime annuity.

However, experts say that some may now reconsider, with rates rising 14.6 per cent since hitting an all-time low in September 2016.

Revival

Many will still be disappointed with the returns on offer, with a £100,000 pension pot buying a 65-year-old level income worth £4,760 a year according to Moneyfacts.co.uk.

Head of pensions Richard Eagling said annuities are still the only “at-retirement” product that guarantees to pay a monthly income for as long as you live, whereas money taken as cash or left invested via pension drawdown can run out.

Annuity income is protected too if stock markets crash.

Eagling added: “The question is whether rates are now high enough to tip the balance of power back towards annuities.”

Lifetime income

Emma Byron, managing director at Legal & General Retail Retirement Income, said annuities increasingly represent good value for money and could recover their lost popularity: “The Bank’s base rate rise has set the scene for future increases in annuity rates.”

Patrick Connolly, financial planner at advisers Chase de Vere, said a combination of a lifetime annuity, state pension and final salary scheme could offer a steady income to cover life’s essentials. You should only invest your pension in the stock market via income drawdown once you have the basics covered: “Otherwise you may be gambling with money you might need for dayto-day bills and living expenses.”

However, most people will still consider annuities to be poor value, while others are reluctant to sign up because you are then locked into a contract for life: “Pension freedoms allow you to get hold of your money when you want, making annuities seem old-fashioned and inflexible.”

However, that could change if stock markets fall sharply and those in drawdown saw the value of their pension plummet.

He added: “Annuities could be more popular when we see people who took advantage of pension freedoms make bad choices and run out of money, as some inevitably will.”

Guarantees

Andrew Tully, pensions technical director at Retirement Advantage, said another long-standing criticism of annuities is that if you die soon after taking one out, your pot dies with you: “Now people can choose income guarantees of up to 30 years so their families will get some money back.”

The number of companies offering annuities has shrunk with LV=, Prudential, Standard Life and others pulling out of the market.

Aviva, Canada Life, Hodge Lifetime, Just, Legal & General, Retirement Advantage and Scottish Widows are now the main providers.

Tully said to shop around if buying an annuity and give your pension provider health details to make sure you get the best rate: “Smokers, for example, will get a higher income as their life expectancy is shorter.”

Mix and match

Another option is to use part of your pension to buy an annuity to cover essentials then leave the rest invested in drawdown.

“You could buy several annuities at different ages, benefiting from rising rates,” he said.

New “hybrid” retirement accounts are more flexible than old-fashioned annuities, while still offering a guaranteed income for life, he added.

Annuities still have a long way to go, but at least they have made a start.



READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.