Pensions Freedom Choice And Danger Annuities Guarantee An Income For Life Dont Write Them Off
Annuities guarantee an income for life – don’t write them off
When polled on retirement options two-thirds of respondents gave their highest preference to getting a guaranteed income for life. Annuities provide, by definition, a guaranteed income for life.
The new freedom to draw DC benefits as you please is often described as representing an end to compulsion to buy an annuity and a response to bad publicity that annuities have got. This creates a danger that members will not properly consider annuities, as an option.
Annuities eliminate exposure to longevity risk and investment risk and, at a price, inflation risk.
A common criticism of annuities is that you lose out if you die young. This is inherent in the product as it is priced on the basis of average life expectancy, and so what is lost by those who die young is gained by those who live longer than the average. The downside risk can be limited by buying an annuity with a guaranteed minimum period of payment and, if eligible, an impaired life annuity. The criticism of other strategies for providing for retirement is that they do not guarantee to maintain a defined level of income for your whole life.
At first sight, annuities may appear poor value. In recent years their cost has risen as a response to longer life expectancy and low-interest rates. There has also been bad press relating to people not being given the best deal open to them, though this resulted in part from people not exercising their rights to shop around.
One good way of getting an understanding of how much an annuity might provide and what options can be built into it can be gained by visiting the government facilitated money advice service annuity comparison website: https://comparison.moneyadviceservice.org.uk/en/Annuity/Quotes.
Annuities can be bought with a range of features and the site gives a clear idea of how these affect the amount you will receive. Based on current rates (March 2015) the following results emerge:-
For a man aged 65 the cost of the most basic annuity is about £1 of lifetime income for £18 – so a pot of £25,000 would produce a lifetime income of around £1,380 p.a.
Variants on this may increase or decrease the initial amount
- A guarantee of ten years payments, if you die early, reduces it by around 2%
- Providing a 50% spouse pension reduces it by around 10%
- Increases during payment of 3% p.a. reduces it by around 30%
- If the annuity was bought ten years earlier at age 55 it would start 25% lower
- Smoking and health issues could increase the initial amount by amounts up to 30%
- Annuities can be bought at retirement or later during your retirement. You can use all or part of your funds to buy an annuity.