Are annuities part of your retirement income plans?

Research from the Association of British Insurers shows that annuity sales have reached a 10 year high, rising 24% from 2023 to 2024.

Annuities have long been a cornerstone of retirement planning, providing a guaranteed income for life or a set period. However with recent shifts in the interest rate environment, annuities have become increasingly attractive.

Interest rates and annuity rates

The UK’s interest rate landscape has changed dramatically since the high inflation of 2023. Prior to this period, annuity rates were suppressed due to historically low interest rates and government bond yields. However, as central banks raised rates to combat inflation, annuity rates improved significantly, making them a more attractive option compared to previous years.

The role of annuities in pension planning

An annuity is an insurance product that converts pension savings into a regular income, offering financial stability in retirement. The primary advantage of annuities is their ability to provide guaranteed income, ensuring retirees do not outlive their savings. Unlike drawdown pensions, which depend on market performance, annuities offer peace of mind through predictable payments.

Enhanced / impaired life annuities for ill-health and lifestyle factors

One of the lesser-known advantages of annuities is the potential for enhanced rates for individuals with certain health conditions. Those with medical conditions such as heart disease, diabetes, or a history of smoking may qualify for higher pay-outs. This is because insurers assess life expectancy and offer better rates to individuals with lower predicted longevity.

Given that many retirees may have underlying health conditions, an enhanced annuity can significantly improve retirement income. For those approaching retirement, it is always worth obtaining medical assessments and quotes from multiple providers to maximise annuity benefits.

Fixed-term and temporary annuities

For retirees who do not want to commit to a lifetime annuity, fixed-term annuities present an alternative option. These provide guaranteed income for a set period, such as five or ten years, after which retirees can reassess their options.

Temporary annuities can be useful for those bridging the gap to a later retirement age, State Pension eligibility, or waiting for market conditions to improve before making long-term financial commitments.

Phasing your annuity purchase

One option is to exchange some of your pension pot for an annuity, whilst leaving the rest invested. This can help you to balance the trade-off between taking a smaller annuity initially as guaranteed income, and leaving the remainder of your pot invested until a later date to benefit from any market growth – although this is not guaranteed, and you may end up with less than you started with. When you annuitise in the future, the rates could be higher, as you will not have as long to live, and you may potentially be suffering from ill health.

Financial planning actions to consider

If you’re considering purchasing an annuity, here’s some points to consider

1. Assess the market: Given the improved annuity rates, it’s important to compare current offerings.
2. Consider health conditions: If eligible, exploring enhanced annuities can significantly boost your annuity income.
3. Weigh fixed-term versus lifetime annuity options: If you’re uncertain about long-term commitments, consider temporary annuities as an option
4. Compare Providers: The ‘open market option’ allows you to shop around rather than staying with your current pension provider. There could be a significant difference between the highest and lowest annuity quotes.
5. Always seek financial advice: Annuity decisions are irreversible, so it’s important to always seek advice.  Annuities and pension planning can be complex so speak to your Origen financial adviser who can help you to optimise your retirement income based on your individual circumstances.

With today’s improved rates and tailored annuity options, retirees have more opportunities to secure a stable and enhanced income. Your Origen adviser will help you understanding your options and help you towards achieving your retirement goals.

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