BLOG: Market volatility is one reason not to discount an annuity
Since the introduction of pension freedoms, far more savers have chosen to keep their pension invested, drawing an income from them, rather than opt for an annuity.
After enjoying a decade of gains, recent market volatility has meant many savers have had to endure the value of their pension falling suddenly, and unexpectedly.
In the good times, it’s easy to forget that investing means risk. However, in recent weeks as share prices around the world slumped, it’s a painful but important reminder that markets can go down, as well as up.
With uncertainty around markets likely to linger for the foreseeable future, we predict more people will rethink how they take an income in retirement.
And while annuities won’t be right for everyone, they do have a place in providing people with a foundation level of guaranteed income, which can offer peace of mind and security.
There are many considerations which will affect your decision about whether to buy an annuity, but for those weighing up their options, here are some of the points to keep in mind:
Annuities offer a guaranteed income
While the recent cut in interest rates has had a knock-on effect on annuity rates, it’s important not to ignore the value that annuities can offer relative to other retirement income options, especially in the context of the risk you’re taking.
On average we are living longer, making it harder to plan how we make our money last. Annuities help guard against the risk of running out of money by paying a guaranteed income until death, whereas those wholly reliant on investment returns risk losing out when markets fall and dividends are paired back.
While this isn’t as much of a risk in the early years of retirement, it could become more difficult to manage as you get older.
There is value in shopping around
Nowadays, there is more market variety and competition than ever, and rates can vary considerably.
The first one you see – or that is linked to the provider you’ve been saving your pension with up to this point – may not always be your best option. Use a free tool like Annuity Ready to compare quotes.
Enhanced rates for medical conditions
You may get a better deal if you have certain combinations of lifestyle and health conditions: the exact opposite of a traditional insurance policy.
We get it drummed into our minds that if you have an illness or you smoke or you drink, then that’s going to have a detrimental impact on the premium you pay. But for an annuity, it’s different and you may actually get a better rate.
Annuities can offer flexibility
Innovation in the market has led to the rise of fixed-term products that sit somewhere between drawdown and a traditional annuity, delivering a secure income without the commitment of a lifetime product.
These provide a guaranteed income for a defined period of time – in some cases as little as three years – with a lump sum at the end. By acting as a temporary ‘holding house’, these can offer stability in unpredictable, volatile times.
However, once agreed, a pension annuity can’t be cashed in and can’t be changed. It is therefore important to pause, take advice and consider the product that best suits your circumstances.
While annuities can play an important role in any market, they may be particularly useful for savers planning for the future in such a difficult environment.
Emma Byron is managing director, Legal & General Retirement Income