Pension change of fortunes

FIVE THINGS TO CONSIDER BEFORE BUYING AN ANNUITY

ANNUITIES, lifetime incomes from pension savings, have long been criticised for being inflexible and poor value for money, but the past year has seen something of a revival.

The rising interest rate environment has helped push up the incomes on offer with data from Hargreaves Lansdown’s annuity quote engine showing that a 65-year-old with a £100,000 pension could get an income of up to £6,791 per year.

This is an increase of around 16% on the same period last year and almost

40% up on the same period two years ago.

Annuities were once the mainstay of the retirement income market but when the Government brought in the pension freedoms in 2015, giving people more choice and flexibility with their pension savings, they dropped out of favour.

Helen Morrissey, Hargreaves Lansdown head of retirement analysis, said: “Their recent change in fortunes is prompting more people to look at annuities and anyone in need of some level of guaranteed income in retirement should consider them carefully.

“The main downside of annuities is once you have bought one, they cannot be unwound, so it is hugely important that you do your research before buying and make sure the annuity option you go for meets your needs.”

1 Look at the whole market

The most important thing to do when researching your options is to make sure you get a quote from the open market.

There are several providers out there and they will offer different rates so if you go with the first quote you are given, especially if you stick with the pension firm you have been saving up with, then you risk missing out on a higher income elsewhere.

It is useful to use an annuity quote engine to get quotes from across the market, so you have some idea of the kind of rates on offer.

2 Check if you are eligible for an enhanced annuity

The second thing to consider is your health and lifestyle.

We may be reluctant to divulge habits such as smoking or how much you drink when you go to the doctors but in the case of annuities, being as truthful as possible can actually result in an income boost.

Helen said: “Providers will consider things like your weight, cholesterol levels or medication when assessing your quote. It is also really important to tell them if you have a condition like diabetes or have suffered a health event such as a stroke.

“It could qualify you for what is known as an enhanced annuity, which pays out a higher income based on your potential for decreased life expectancy.”

To get a sense of the extra income you may get from an enhanced annuity, the current best buy generated by Hargreaves Lansdown’s annuity search engine for someone who smokes 10 cigarettes a day is £7,619 per year based on someone aged 65 with a £100,000 pension.

Someone who has had a stroke could get £8,504. The quotes you receive will be personal to you so it is vital you tell your providers details of your health and lifestyle.

3 Consider the impact of inflation

Inflation is another key factor to take into account when you are assessing annuity options as you can get both flat rate and inflation linked products.

We’ve seen the damage high inflation can do to our finances and given the fact you could be retired for 20 years or more, you need to think about how to preserve your purchasing power long-term.

Going with a flat rate option means you get that amount for the rest of your life and what could be a decent income at the start of your retirement may not look quite so generous as the years pass by and prices grow. But you also need to balance this with the fact inflation-linked products tend to have a much lower starting income and it can take years before you make up lost ground.

4 Don’t forget your spouse

If you are married or in a civil partnership, then you probably want to make sure they continue to receive an income should you die before them. You can do this by purchasing a joint life annuity.

A common mistake people make is opting for a single life annuity because the income is higher, but they don’t realise that when they die that annuity would die with them leaving their partner with nothing.

5 Think about buying in chunks

If you are worried about buying an annuity at the beginning of retirement and then finding your circumstances change, it’s important to know you are under no obligation to annuitise your entire pension pot at once.

Helen said: “You can do it in stages throughout your retirement which can give you the flexibility of securing your basic needs through an annuity and leave the rest invested where it will hopefully grow over time.

“Added to this you are likely to get better rates from annuities as you age, and you could qualify for an enhanced annuity which would give you a further income boost.”

Providers will consider things such as weight and cholesterol levels