Annuities have had a tough decade or so with a number of different factors contributing to modest annuity rates including ultra low interest rates and longer life expectancy. When George Osbourne announced ‘pension freedoms’ in 2015 removing the requirement to purchase an annuity this seemed to be the final nail in the coffin. But are they back with a bang?
With rising interest rates over the last 12 months this has led to increases in annuity rates as you can see from the information below.
Age Income
60 £6,497
65 £7,206
70 £7,946
This is the gross annum income based on an annuity purchase amount of £100,000, on a single life basis, paid monthly in arrears, with no escalation and no guarantee period.
These figures are gross, and an individual would need to deduct their marginal rate of income tax. If we assumed the individual to be a basic rate taxpayer a 65 year would net £5,764.80 per annum. It would take just over 17 years for them to receive their money back. A 65-year-old male current life expectancy is 85 and a female is 87, meaning the numbers are starting to look a lot more attractive.
Whilst the financials are important it is also worth while considering the pros and cons, comparing an annuity purchase to that of the drawdown option.
The amount you get is guaranteed.
You pay your provider a fixed amount to buy your annuity. They will then make guaranteed payments to you for the rest of your life or an agreed period.
Once agreed, it can't be changed.
Your pension annuity can’t be cashed in or surrendered. You can’t make any changes once it’s up and running.
Your health and lifestyle matter.
If you’re not in good health, or make certain lifestyle choices, providers may offer you a higher income.
Your loved ones might inherit some money.
You can have a joint life annuity meaning it will continue to pay out in the event of death.
The amount you get is not guaranteed.
The value of your pension pot can go down as well as up. That can affect the amount you can draw down from it. But your payments aren’t fixed – you can choose how much income you want to take, and when. But because it’s not guaranteed, you could run out of money.
Once agreed, it can be changed.
You can draw down as much money as you want, stopping and starting whenever you want to. You can buy a pension annuity at any future point.
Your health and lifestyle don’t matter.
Your age and lifestyle make no difference to the amount you might get from drawdown.
Your loved ones might inherit some money.
You can name a loved one as a beneficiary, so they can inherit your pension fund after you die in fact the pension fund can be passed down through generations.
In summary the drawdown option is likely to provide an individual better flexibility most notably via the income payments and death benefits however the annuity is likely to provide better security of income. There is no right and wrong and it’s always down to an individual’s personal circumstances. I believe It’s important to receive the right advice as the devil is in the detail and an individual shouldn’t make a decision based solely on this article. I am here should you or anyone you know have any questions please do not hesitate to contact me.
