A new dawn for annuities
ANNUITY rates are finally starting to recover after more than a decade in the doldrums, and now pay around £700 more than they did last year.
A 65-year-old buying a single life level annuity with a £100,000 pension can get an income of around £5,600 a year, according to Hargreaves Lansdown, up from £4,882 last year.
That follows the Bank of England’s move to increase interest rates four times since December, to today’s level of 1 per cent.
Annuity providers report demand is picking up as a result, but most pensioners prefer to leave their money invested via drawdown, rather than lock into an annuity. Is this still the best move?
An annuity gives you a guaranteed income for life, no matter how long you live, but once you have bought one you are locked in. So you get security at the expense of flexibility.
With drawdown, retirees leave their money invested in shares to grow, while drawing money as required.
This offers maximum flexibility but with less security, because if the stock market crashes, the value of your pension pot will crash with it.
There is also the danger that you will use up your pension too quickly, leaving nothing for later life.
Annuity rates are improving, but they still have a long way to go, said Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown: “The income is still much lower than before the Bank of England slashed base rates following the financial crisis in 2009.”
Another problem is if you buy a level annuity, your income will stay flat for life, and will slide in real terms as inflation rockets.
A 65-year-old who used £100,000 to buy a single life escalating annuity, where the income grows 3 per cent each year, would only get £3,916 in year one. Another downside is that once you buy an annuity, you cannot change your mind, even if rates rise later, something that is frustrating millions of pensioners today.
One of the big criticisms about annuities is that when you die, the income dies with you, but there are two ways around this, said Stephen Lowe, director of later life advice at Just Group: “First, couples can take out a joint life annuity, that will continue to pay 50 per cent income to a surviving spouse or partner.”
Alternatively, it is possible to buy an annuity with a policy feature called value protection, which allows you to pass on the remaining money to loved ones when you die. “This will cost more but some may think the price is worth paying,” Lowe said.
The choice between an annuity or drawdown is complex, so consider taking independent financial advice.
It is not an all-or-nothing decision, said Andrew Tully, technical director at Canada Life: “You could use a small part of your pension to buy an annuity, to give you a guaranteed income to cover the essentials, and leave the rest invested in drawdown.”
You could then buy another annuity later, and you will get a higher income as your life expectancy will be lower. “Many older people lock into annuities because they do not want the responsibility of making drawdown decisions in later life,” Tully added.