I am aged 68 and enjoying the early years of my retirement. I’m currently drawing money from my pension pot to provide me with a regular income. I also get the full state pension.
Up to this point I have avoided annuities as I have heard bad things about them. I don’t want to part with large amounts of cash in return for a pitiful income.
However, I see in the news that annuity rates are rising. Is now the time to buy one? PC, Preston
Nest egg: While these pension products should be tempting – you get a guaranteed income for life – low rates meant you parted with a lot of money and saw little in return
Ruth Jackson-Kirby replies: For years, annuities have been a hard sell. While these pension products should be tempting – you get a guaranteed income for life – low rates meant you parted with a lot of money and saw little in return.
But rising interest rates have caused annuity rates to push higher too. Annuity rates are now at a 13- year high, making them an attractive pension tool once again.
With an annuity, you hand over a lump sum and then are paid a set income for the rest of your life. How much you get depends on a few factors including your age, health and the annuity rates on offer.
Firms tend to invest in government bonds to generate the returns needed to pay the income on their annuities.
Recent rises in interest rates have caused bond yields to rise and this has led to an increase in the rates offered on annuities.
So, 12 months ago a 65-year-old could buy an annuity with £100,000 and receive an annual income of £4,900, according to wealth manager Hargreaves Lansdown.
Now, a 65-year-old with the same sum to invest would get an annuity income of £6,637.
‘Annuities once ruled the roost in retirement income, but the low rates on offer meant they faced criticism that they offered poor value for money,’ says Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown. ‘These rising rates could encourage more people to give them serious consideration.’
While the income on offer from an annuity has improved vastly, it doesn’t mean we should return to the days when people sunk their entire pension pots into them.
You are already drawing an income from your pension pot and there is no need to abandon that to buy an annuity.
One option is to use a portion of your pension fund to buy an annuity that will cover your basic living costs. That way, you have the peace of mind of knowing you’ll always be likely to pay your bills, while leaving some of your pension invested so it can continue to grow, and you can carry on drawing an income whenever you need it.
So, take a look at your household budget and work out how much you require to cover your basic needs. You said you enjoy the full state pension which amounts to £9,627.80 a year so deduct that from what you need. You could then purchase an annuity to cover the rest. Another option is the ‘flex first, fix later’ approach. This is where you stick with what you are currently doing – and then purchase an annuity in later life.
Phil Boyle, a partner at financial firm LCP, says: ‘Pension freedoms have given people the opportunity to go on investing into their retirement, and in many cases, this will give them a higher standard of living than buying an annuity as soon as they retire.
Flex first, fix later can give retirees the best of both worlds – the flexibility and growth potential of drawdown in earlier retirement and the security of an annuity later on.’
There are several benefits to waiting until you are older before you buy an annuity. You can leave your pension fund money invested, and hopefully growing in value.
Also, annuities rates are on the rise so waiting could give you access to an even better return, even if you only delay for a few months.
You will also find that as you get older you will be offered a higher income annuity, especially if you have developed any health conditions. This is because the annuity provider knows they won’t be paying out for as long when they sell a policy to an 85-year-old than to a 65-year-old.
For example, LCP’s Boyle says an 85-year-old spending £100,000 on an annuity would currently get an annual income of around £14,617.
There is no limit on the number of annuities you can buy, so you could purchase one in early retirement to cover your basic household costs – then another in later life when you want more financial security.
