Are annuities worth it? Weighing up the pros and cons

Are annuities still a good investment for your retirement income? We weigh up the pros and cons of buying an annuity with your pension fund.


Watching your money grow over time

The pros and cons of buying an annuity with your pension fund.

Until April 2015, the most common way for people to use their pensions to provide an income over the course of retirement was to buy an annuity.

An annuity is a product that converts a chunk of cash into a guaranteed monthly income for the rest of an individual’s life.

New pension rules, however, mean that savers now have more freedom to choose how to use their funds – so if they don’t want to buy an annuity they can leave their money invested in the stock market, for example, while making regular withdrawals to cover living expenses.

So what are the advantages and disadvantages of annuities? Do they still have a role to play?

Six reasons to switch your pension today.

Advantages

ŸGuaranteed income

The money you get from an annuity can never run out: the provider guarantees to pay you a certain amount every month, however long you live.

ŸNo falls in value

This income will remain at the same level and it will not fall if there is a stock market crash, say.

ŸProtection against inflation

Some annuities – known as index-linked annuities or rising annuities – pay a higher monthly amount every year in order to counter the effects of inflation. But this feature comes at a cost, and income in the early years will be lower than with a level annuity.

ŸIncome for your spouse

A joint-life annuity can continue paying an income to your husband or wife after you die.

Higher income for people with health problems

If you suffer from a medical condition, such as heart disease or diabetes, you could be entitled to a higher annuity income due to your lower life expectancy.

Read our guide to reviewing your pensions.

Disadvantages

ŸAnnuities are irreversible

Once you have entered into an annuity contract, you generally cannot change your mind and cash it in (although there are plans to allow annuities to be sold in some circumstances – the government is currently consulting on how such a system would work).

ŸRates are low

As a result of the financial crisis and rising life expectancy, annuity rates today are about as low as they have ever been.

ŸNo chance of growth

If you left your money invested in the stock market, you could make considerable gains if share values rise – this could help provide a more comfortable retirement. (Of course, the opposite is also true, and you could lose money and see your income and savings diminish.)

ŸInflation can eat away at your income

If you opt for a level annuity, your income can lose much of its spending power over time as a result of inflation.

Want to find out more about investments? Read our beginners' guide.

Your annuity strategy

If you have no other savings or assets, buying an annuity with at least some of your pension can help provide a guaranteed income that, combined with your state pension, covers your basic living expenses.

If you have other sources of retirement income, on the other hand, you may be happier to take more risk with your savings and carry on investing in the stock market.

If you are retiring soon you may be able to get more retirement income through the Saga Annuity Service, click here for more details.

Chris Torney / 26 June 2016
The opinions expressed are those of the author and are not held by Saga unless specifically stated. The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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