It’s certainly been an interesting year for the financial markets, and, while things have quietened down in the last couple of months, the uncertainties have been leading many people to look around for greater stability when it comes to planning for their retirement.
Unlike many other types of retirement products pension annuities are unaffected by the ups and downs of the stock market. This means that you can rest assured knowing that your income is safe and secure, no matter what happens to the stock market. The continued rise in interest rates that we’ve seen this year, combined with the market volatility and the significant rise in annuity rates compared to previous years has meant that these products are making a comeback.
How do annuities work?
When you buy an annuity you convert all or part of your pension pot into a guaranteed regular income. They can be popular with people who want to be sure that they’ll have enough income to last them for the rest of their life, particularly if they’ve saved into a defined contribution (DC) pension during their working life.
From a tax perspective, annuities are treated as earned income and subject to Income Tax; however, they’re not subject to National Insurance Contributions. Annuities are also 100% covered under the Financial Services Compensation Scheme (FSCS) so are protected even if the annuity provider were to fall into financial difficulty.
More choice and flexibility
There are now a wide range of annuity options available, which can be tailored to suit each individual’s income needs and provide substantial benefits.
- Value protection: One of the main objections to an annuity can be that you lose access to your pension pot and if you die early you may not receive value for money. ‘Value protection’ means that in the event of early death, some of your pension fund is paid back to your dependants.
- Inflation protection: Many annuities also offer the option to increase in line with inflation which can help to ensure your income keeps pace with the cost of living. However, these cost considerably more than fixed annuities, so your starting level of income will be considerably lower.
- Spouse’s/Dependants’ income: At the time you buy an annuity you can build in provision so that on your death the annuity will continue to be paid in part or in full to your spouse or dependants.
- Enhanced annuities: If you have a shortened life expectancy due to a health condition such as heart disease, cancer or diabetes, an enhanced annuity can provide a higher income in retirement, making it easier to cover essential costs and enjoy a comfortable lifestyle.
The re-emergence of annuities is a welcome development if you’re reaching retirement or are in the early years of retirement and planning for the future. If you have already retired you may also want your pension fund to stay invested early on and then buy an annuity later in life, so that you have a guaranteed income when this becomes a priority (perhaps in the event that you need to pay for care costs). There are advantages and disadvantages to this approach and it ultimately depends on your individual circumstances.
Your Origen adviser can help review your financial plans based on your own circumstances. Please contact your adviser directly or call our Origen Client Services Team on 0344 209 3925 or at firstname.lastname@example.org
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