Are Annuities Back for good?
Many moons ago when I was just a young (and wet behind the ears) financial adviser with Pearl Assurance the only option available to people with a personal pension at retirement (or as they were known back then, retirement annuity contracts) was to buy an annuity.
An annuity is simply a guaranteed income for the life of the pensioner but with the option to build in a range of other options such as a spouse’s pension and indexation (increases to combat the effects of inflation). Even then, the annuity options with different providers could be somewhat limited. But how times change! Now barely anyone buys an annuity, “why is that?” I hear you ask.
For two reasons, although annuities offer a guaranteed income for life, in recent years they have offered poor value for money. When interest rates fell after the Great Financial Crisis of 2008, the rate of return that you could lock in was often very poor and unattractive. Then in 2015 George Osborne, the then Chancellor of the Exchequer introduced pension freedoms. The big fundamental change in 2015 was the ability to pass any residual pension free of tax to your nominated beneficiary when you died even if you had started to take benefits from your pot. This was a huge change as previously any residual pension passed to anyone but a spouse was taxed at very high rates. And from then until now this pretty much was the final nail in the annuity coffin.
So interest rates have gone up, has anything changed? In the last year alone we have seen annuity rates rise by as much as 40% and they could rise further in the future. You can now also extend the guarantees available allowing pension income to be passed on to your beneficiaries in some cases for up to 30 years.
Does this make annuities a screaming buy again? Not for everyone and especially if you want the whole of the pension that is left after you’ve gone, to go to your beneficiaries. But they are at least now offering better returns on your money and are a really useful tool to ensure that your fixed expenditure is covered throughout retirement.
For more information and to find out if an annuity is the right route for you to help navigate your retirement, please contact us in the usual way firstname.lastname@example.org or call us on 01388 439840.