You are here: Home -

Five questions you should ask before buying an annuity

0
Written by: Martin Tilley
30/01/2018
Annuities have lost their lustre as the flexibilities of pension freedoms gave retirees much more choice on how and when to take their retirement income. But they shouldn’t be disregarded. Here are five questions to ask before swapping your savings for a guaranteed income for life.

For people retiring 20 years ago, there were few options when reaching retirement. The alternatives extended to perhaps two or three annuity options.

Although income drawdown was in its infancy, it was not widely publicised or used at the time, possibly due to the more attractive returns offered by annuities.

Fast forward to now and the situation has nearly reversed, with flexi-access drawdown almost a default choice. In addition, with many articles praising the benefits of drawdown over annuities, individuals could be forgiven for overlooking annuities altogether.

However, an underlying fact of drawdown is that you must understand and accept that you are taking on the risk of your money running out before you die because the length of your life and the investment returns are variable and outside of your control.

If these risk factors can’t be understood and accepted, an annuity could be right for at least some of the funds available from pension plans.

So what factors should you take into account when considering an annuity?

1) How much secure income do you need?

Is it just enough to cover your basic monthly outgoings or would you prefer your whole income to be certain and for the remainder of your life? One of the factors of income drawdown is that any funds remaining in the pension on death can be passed to loved ones. Do your income needs outweigh the wish to pass on any remaining capital on your death?

2) What degree of guarantee should you build in?

An annuity will pay an income for life, but ceases on death. It is possible to buy a guaranteed minimum income so that in the event of early death following purchase, the annuity would continue for a minimum period. Although this feature reduces the initial starting level of income, it may provide peace of mind if you’re worried about unexpected early death.

3) Should you include a spouse’s pension?

A pension need not stop totally on the death of the annuitant. Often it can continue to a surviving spouse at a reduced rate for the remainder of their life. This feature will also have a cost and could reduce the members starting level of pension. Consider this if your spouse might be expected to outlive you.

4) Should an annuity be level or escalating?

Your pension capital will buy a higher starting pension if it is level in payment but be careful as inflation could erode the value of the pension significantly over the remainder of your lifetime. An escalating annuity is one which increases each year, usually at a fixed rate being perhaps 3% or inflation.

5) Your health and that of your spouse

Annuities work by pooling expected mortality, where those who die early cross-subsidise those who live longer. However, if you have a known health condition or even a lifestyle that may lead an annuity provider to believe your lifetime might be impaired, they may apply special rates enhancing your annuity income in view of the perceived shorter period that it will be payable.

Most importantly, you should shop around or take advice from a regulated financial adviser. There are far fewer annuity providers than there were but still enough of a market to seek out the best deal.

Martin Tilley is director of technical services at Dentons Pension Management

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Just how safe are contactless cards?

Contactless cards have soared in popularity but security is still a major concern for many consumers. We answe...

Govt will have to justify planned increase to state pension age

The government will have to justify proposed changes to raise the state pension age, which could see millennia...

Petrol stations overcharging drivers by at least £2.50 a tank

UK drivers are being “fleeced” at the pumps with petrol stations overcharging by at least £2.50 per fill up, a...

Ryanair jetting towards US flights for £10

Ryanair is on course to achieve its long-held ambition of offering transatlantic flights to the US – and the...

Investing in car parks: a good vehicle for income seekers?

As the search for income continues, many investors are turning to alternatives, with car parks becoming increa...

Tesco expected to post significant write-offs

Tesco is predicted to unveil the biggest loss in its 100-year history, according to analysts.

Results round-up: Companies to watch this week

Mulberry and more will face the music this week.

Product launches of the week

Select Property Group, Schroders, Leeds Building Society and more have exciting news this week.

YourMoney.com Awards 2018

Now in their 21st year, our awards recognise the companies offering the best products and services to consumers

Money Tips of the Week

Read previous post:
2285919-online-shopping
Consumer confidence starts to rise again

Weakening retail sales may tell a different story, but UK consumer confidence remains high.

Close