How to make your pension last for life
Crash!) even if stock markets
YOU might be tempted if someone offered you an investment guaranteeing a secure income that would cover all your regular bills until the day you died.
After all, that’s the Holy Grail for savers trying to make their pensions last into old age. But would you be as keen if you heard that the name of the investment was … an annuity? Possibly not.
Annuities became tainted when we were compelled by law to swap our pension savings for what was often a very poor income.
Bad industry practice, where firms would offer dire deals to customers who had saved with them for decades, reinforced the feeling that annuities were heading for dodo Land.
But two-and-a-half years after pension freedoms removed the compulsion to buy an annuity, they are still with us — and some experts argue that they have a place.
They cite the certainty that the income will be there no matter how long you live.
Income draw-down — the main alternative to an annuity, where your cash stays in the stock market and you take an income gradually — can leave your money exposed to investment risks, which could force you to take a cut in income, possibly at a time when prices are rising.
And there is the danger that if you live long enough, you could run out of money.
Crucially, though, you don’t have to choose between an annuity and income draw-down — you can do a bit of both.
FOR example, you might buy an annuity with a small chunk of money to provide just enough income to guarantee covering essential bills such as gas, electricity, food shopping and the cost of running a car.
If you don’t have a separate final salary pension, this takes the pressure off when you’re investing — or spending — the rest of your retirement fund: you can feel safe that should the worst happen, you’ll still get by.
‘Say you are receiving the new state pension of £8,297 a year and your outgoings are just over £11,000 a year, then buying an annuity to bridge that £3,000-ayear gap could make a lot of sense,’ says John Lawson, head of pensions policy at Aviva.
‘An annuity can also be the right option if you only just have enough income with your state pension and private pension savings to cover your fixed expenditure. You can’t afford to take the risk of going into income draw-down and having your income fall.’
As a guide, the Joseph Rowntree Foundation think-tank reckons that a pensioner couple needs between £14,300 and £17,630 a year to live comfortably, depending on whether they still have housing costs.
So what exactly is an annuity? And why did it become such a dirty word if it can be so useful?
At its most basic, it’s a type of insurance policy. Think of life insurance, but in reverse: rather than paying monthly premiums for a lump sum when you die, you hand over a lump sum and get monthly payouts until you die.
The insurance comes in where the company selling the annuity guarantees it will keep paying you a set income. It doesn’t matter if interest rates move, stock markets crash — or you live to be 105.
It was the way annuities were sold, the measly returns on offer and the fact they were compulsory that gave them a bad name.
Many of those hit by annuity misselling were in poor health. They should have been offered special rates to reflect their shorter life expectancies — caused, for instance, by high blood pressure or smoking — but were routinely short-changed.
Savers were also put off annuities because rates collapsed from more than £10,000 a year for every £100,000 you had saved up in the Nineties, to nearer £5,000.
The frustration of having to buy one of these deals was understandable because once you buy an annuity, you’re locked in for life. The rate doesn’t change and you can’t take the money out if you change your mind.
Sales of annuities are at their lowest since pension freedoms were introduced in April 2015.
In the six months to March 2017, 33,561 were sold, according to figures from the Financial Conduct Authority. That’s a 21 pc fall on the previous six months. Nevertheless, they still account for around one-eighth of all pension pots accessed.
One reason the experts expect annuities to continue to sell is the sheer number of people approaching retirement. Around 680,000 people hit the age of 65 every year, but over the next 12 years that number will increase to around 900,000 a year. Many will require some guarantee on their income.
danny Cox, chartered financial planner for adviser Hargreaves Lansdown, says: ‘An annuity may give the guaranteed income element of a mix-and-match package. If you used the annuity to cover fixed outgoings, you could invest the rest to try to gain a bigger income and inflation protection.’
It’s worth talking to a financial adviser before you make any decision. Find one near where you live at