Let’s talk about: Annuities

Is the UK in recession? There seems to be a lot of conflicting data, but one thing seems certain (according to the Bank of England and Office for Budget Responsibility) the UK will be in recession in 2023.  With the doom and gloom and turmoil of the financial markets you’d be forgiven for thinking that there is no glimmer of hope, but, there is one product which has come back into the pension limelight.. annuities!

Annuities fell out of favour because they were deemed to be poor value as interest rates went to near 0% following the financial crash of 2008-2009. However, following recent interest rate rises, (some) annuity rates are up by 44% over the last year and at the highest level since 2009!

So with rising fuel and household bills, is now the time to buy an annuity?

First, let’s consider “what is an annuity?”

An annuity is a product which takes your pension savings and converts it into a guaranteed income for either the rest of your life or for a fixed term.

Once you have decided that an annuity is right for you (more on this later) you need to decide what features you want to include:

• Fixed (level) or increasing income – you can choose to set your income so that it stays the same or increases each year to help keep pace with inflation.  You can select for your income to increase by a set percentage or in line with the retail price index (RPI).
• Monthly or annual payments – in advance (at the start of the month or year) or in arrears (at the end of the month or year).
• Spouse or dependents annuity – you can choose to ensure 50%, 67% or 100% of your income continues for your loved ones when you are no longer around.
• Guaranteed minimum payment period – you can choose to guarantee your income for a specified term even after your death.  For example if you choose a 10 year guaranteed minimum payment period and die in year 5, your loved ones will continue to receive your income (or may have the option to take it as a lump sum) for the remaining 5 years.
• Protecting all or part of the amount used to purchase your annuity – when you die a lump sum is paid for the amount protected less any payments already paid.  You can choose to protect 25%, 50%, 75% or 100% of the amount used to buy your annuity.

It is important to remember that including some or all of these features will affect the amount of income you will receive.

Is an annuity right for me?

To be eligible for an annuity you need to be aged 55 or over and have a minimum of £5,000 in your pension pot.

• If you want a guaranteed income for life – an annuity will provide you with certainty that your income will last throughout your lifetime.
• If you want to support your loved ones – an annuity can provide them with an income when you die.
• If you want protection from investment risks – your income is not impacted by market fluctuations or what is happening with the economy.
• If you have health concerns – you may be entitled to an “enhanced annuity” if you suffer from certain medical conditions and means you may be entitled to a higher level of income

Things to consider

• Once your annuity is set up there is no going back – so you need to be certain about the choices you make at outset.
• Once set up, (generally) there is no cash in or surrender value.
• Annuity income is taxable, therefore any income over and above the personal allowance will be taxed at 20%.  It could also affect any entitlement to means tested benefits.
• You could get back less than you paid depending on the options chosen and how long you live.

To get an idea of how much income you can secure  why not give our online calculator a try, or for a more personalised quote get in touch and speak to one of our friendly advisors on 01388 439840 or email letstalk@fathomfinancial.co.uk