When Pension Freedoms legislation introduced “flexible” options in 2015, the traditional guaranteed income for life – a pension annuity – suffered. The Guardian confirmed at the time that annuity rates had hit an all-time low.
Now, though, prolonged market volatility and global economic uncertainty have seen the tide turn. A desire for stable and secure income – and improved rates – saw annuities soar in the first three months of 2023.
This is Money recently confirmed that retirees bought around 16,250 annuities in Q1, a 22% increase on the previous quarter. The rise amounts to around £1.2 billion worth of purchased income.
Figures published by Money Marketing, meanwhile, suggest that those seeking an annuity could be set to double.
Keep reading for five important factors to consider before you opt to buy an annuity.
1. A guaranteed income for life makes budgeting easier
Before deciding on an annuity, you’ll need to be clear about exactly why you are making this choice.
The recent Money Marketing report found that around 990,000 UK workers over the age of 55 are considering an annuity for the first time thanks to increased rates, but also because of the cost of living crisis. (This is on top of an estimated 828,000 working over-55s who already intended to buy an annuity.)
The appeal of a known and stable income in uncertain times can’t be understated. Knowing how much income you are due, and when, makes budgeting simple.
If you will have known, fixed expenses to cover in your retirement, an annuity could be the perfect choice.
2. An annuity offers guarantees and assurances in a volatile market
With some flexible pension options, mismanaging your income could lead to your money running out, just when you need it most. This won’t happen with an annuity.
Once you agree to a pension quote and buy your annuity, you’ll not only know how much you will receive each month, but you also have the peace of mind that you will receive this amount for life.
You might opt for other guarantees too. These could include a spouse’s pension, which continues to pay to your partner after your death. Or an annuity that rises each year to combat the effects of inflation.
These options can be useful, but you’ll need to remember that they are more expensive than a fixed, single-life annuity, so your starting income is likely to be lower.
3. Recent improvements in rates
Annuity rates are linked to interest rates, which have been on the rise of late. In fact, the Bank of England (BoE) has increased its base rate at 12 consecutive meetings of its Monetary Policy Committee (MPC).
Annuity rates are also rising, and according to FTAdviser, reached a 14-year high back in October 2022. Rates increased by 52% in the first nine months of that year.
The increase means that you can now receive more income from the same size pot and also that you’ll break even (when your annuity has provided more income than you originally saved) after just 15 years of retirement, down from 22 years before the recent rate rise.
4. It’s more important than ever that you shop around
While rising rates are great news, it has become increasingly important to shop around.
Professional Adviser recently confirmed that the gap between the best and worst rates available on the market has widened. It is currently the biggest it has been for four years.
The report found a 4% difference between the best and worst annuities on offer, equivalent to as much as £500 a year for the rest of your life.
At HA&W, we can help you to find the best retirement solution for you. If that is an annuity, we can also shop around on your behalf, making sure you receive the best rate possible for the type of pension income you choose.
5. Consider if a mixture of options might be best for you
Pension Freedoms introduced several flexible pension options and it’s important to remember that you don’t need to stick to just one.
You might use one pension pot you hold to cover fixed expenses via an annuity. This could free you up to be more flexible with the other pensions you hold.
Flexi-access drawdown allows you to withdraw from your pension as and when you need it. An uncrystallised fund pension lump sum (UFPLS), meanwhile, allows you to take your entire pot as a lump sum (or a series of lump sums).
These options could be useful for covering one-off luxuries like a holiday or house renovations, but you’ll need to budget carefully.
There are tax implications to consider too, as certain options could trigger the Money Purchase Annual Allowance (MPAA), severely limiting the amount you can continue to contribute to the pensions you hold.
Get in touch
Your retirement is a time to relax and enjoy the fruits of your decades of work. But there are some important decisions to make first, and ongoing management of your income will be key. Thankfully, we’re on hand to help.
Contact us now to find out how our Chartered financial planners could help you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
