When Britain’s pension system was reformed in April 2015, it was expected to signal the demise of annuities. These are financial products that, until then, most people had bought at retirement to provide a guaranteed income for the rest of their lives.
What is an annuity?
But last year’s upheaval has meant that people now have far more choice over how to use their pension savings. It has become easier to leave money invested in the stock market, or even to take it out of a pension fund as cash.
Annuity sales have certainly fallen – but that doesn’t mean they have nothing still to offer. In fact, for many people, using at least a chunk of their pension funds to buy an annuity can still be a sensible choice. Here’s why:
1: Your money won’t run out
The main attraction of an annuity is that it guarantees to pay you an income for the rest of your life.
You could instead choose to keep your money invested in the stock market in order, hopefully, to benefit from future growth, while taking a regular income from your fund – a process known as drawdown.
But if you take too much income or the investments don’t grow as much as you’d expected, there is a chance that your fund will run out at some point, leaving you with just your state pension to live on - not something you'll need to worry about with an annuity.
Are you overestimating your pension pot?
2: No more tricky decisions
If you buy an annuity instead of keeping money invested, you won’t have to make any more decisions about how to fund your retirement – for example, whether to change the risk levels in your pension savings, or if you should change the amount of income you take.
Essentially, fluctuations in the stock market will no longer be a big concern for you.
3: Protection against inflation
If you like, you can buy an annuity that increases payments every year in line with inflation: this means the buying power of your retirement income won’t diminish over time.
If you opt for an inflation-linked annuity, your initial income will be lower than a standard annuity: this is to make up for the higher payments you’ll be entitled to later on.
4: More money for people in poor health
If you have a medical condition such as diabetes or heart problems, you could be entitled to higher levels of annuity income. The amount you get depends on your life expectancy: people with shorter life expectancies get higher payments.
How long do we really want to live?
5: Guarantees for your spouse
It is also possible to set up an annuity so that your spouse will continue to receive payments for the rest of their lives if you die before they do.
Spouses can inherit the money you have in drawdown investments, but again there is the risk that funds may have dwindled significantly.
Can you inherit a private pension?
If you are retiring soon you may be able to get more retirement income through the Saga Annuity Service.