Annuities have been rather unfairly maligned in recent years often with the perception that they aren’t great value for money. A lot of the perceived lack of value has been down to the falling annuity rates over time which has mainly been driven by rising life expectancy and low interest rates.
One of the outcomes from the rather unusual market conditions over the last year is that annuity rates have increased substantially.
A Guaranteed Lifetime Annuity is where you can use your pension pot to provide you with a regular guaranteed income in retirement. At the end of January 2022 a £100,000 pension pot could have bought an annuity income of £5,003 a year. Whereas in January 2023 the same amount could have bought an annuity of £6,892 a year. That’s a near 38% increase! The figures above were based on a married 65-year-old and a single life level annuity, with a five year guarantee and income being paid monthly in advance.
This certainly does put a different light on annuities and perhaps changes some people’s perception with regard to the increased value for money that annuities may provide for some people.
Who might an annuity be suitable for?
An annuity could be suitable for someone who wants or needs a guaranteed income from their pension pot. There is no investment risk with an annuity and therefore this could be suitable for someone who has a lower risk tolerance or lower capacity for loss; or just someone who would prefer not having to worry about the uncertainly of financial markets in their retirement and is happy to receive a steady income.
What options are available?
A lifetime annuity will be paid for however long the annuitant lives for. However there are options as to how this is paid out and what happens upon the death. A joint life annuity can be selected, where a percentage (commonly 50%, 67% or 100%) of the annuity income payments can continue to be paid to a a spouse or partner after the annuitant dies.
Having a guarantee period could mean that benefits are paid for a minimum period of time regardless of when the annuitant dies, or capital protection could potentially provide a lump sum death benefit usually equal to the amount used to purchase the annuity, minus the total of all income payments made.
An annuity can also be set up to pay out the same amount throughout it’s lifetime (level annuity), or offer an initial lower starting level but include annual increases, either linked to the Retail Prices Index, inflation or a set percentage. Most people opt for monthly payments, but they can be made yearly, half-yearly or quarterly as well as having an advance or arrears option.
The rapid rise in annuity rates in recent months has also seen a growing gap between the most and least competitive annuity deals, potentially resulting in savers spending more than necessary to secure the retirement income they need. Retirement Specialist the JUST Group have recently released a study showing that the best standard (non-personalised) annuity is currently delivering about 14% more secure income per pound of pension pot compared to the worst deal and many people would get even more once their medical history and lifestyle is taken into account. This therefore shows the importance of shopping around.
Drawbacks of an annuity
The basis of the annuity is chosen at the outset and once established a lifetime annuity is set in stone, so cannot be amended to adapt to any future changes in circumstances.
In addition, being a low risk product means you are sheltered from market volatility, however this does mean you do not benefit from any future investment growth.
Expert advice to understand your pension options
Annuities continue to play a valuable role for many people as part of their overall retirement income strategy. However it’s very important to seek financial advice when purchasing an annuity, as this decision is usually irreversible.
At Origen, our advisers will select the most suitable product by taking a whole of market approach with the annuity providers and identify the provider who is offering the best rate for your specific circumstances. We will also gather health and lifestyle information to look for any opportunities to secure an enhanced annuity rate from the providers.
Please contact your Origen adviser who can help you understand all the options available, review your circumstances and provide recommendations to make sure you get the most out of your retirement.
You can find more information about your annuity options in our Autumn 2022 edition of Aspire, which you can view here: Aspire Magazine – Autumn 2022