However you plan to spend your hard-earned retirement, you are probably going to rely on your pension wealth to provide you with an income. Because of this, you might be wondering how you can get the most value out of your funds.
One option that you could consider is an annuity, which can provide you with a guaranteed income throughout your retirement.
Read on to find out what annuities are, some reasons to consider them and whether they might be right for you.
An annuity can offer you a guaranteed annual income
To put it simply, an annuity is a type of insurance product that will give you a guaranteed regular income for either a fixed term or for the rest of your life. You can choose to buy one with either some or all of a pension fund.
Typically, the amount that you will receive depends on several factors, such as:
- How much wealth is in your pension pot
- The annuity rate when you buy
- The type of annuity you buy. For example, is it index-linked or will it provide your spouse with an income when you pass away?
- Your health, age and lifestyle.
As you might imagine, people who are older or in poor health typically receive a greater amount of monthly income than younger and healthier people do. This is because they are more likely to pass away earlier, so your provider will not have to pay out for as long.
In the past few years, annuities have waned in popularity among retirees, partly because – due to a long period of very low interest rates – the income provided had slumped. However, this trend is starting to change due to shifts in the economy.
Since the price of annuities is heavily based on the yields available on government bonds (known as “gilts”), they have also risen in step with the Bank of England’s increases to the base rate. As we discussed in another article, this move was prompted by rising inflation in the UK, resulting in income from annuities increasing sharply in the past few months. This surge means that this option is now much more attractive.
An annuity can give you greater confidence in your financial security
While they may have fallen out of favour in the past few years, there can be many benefits to buying an annuity. Some of the main ones are:
The security of a guaranteed income
One of the biggest draws of buying an annuity is that it provides a guaranteed income for either a term of your choosing or the rest of your life. In comparison, the value of a drawdown pension can often depend on stock market movements, so its value can rise and fall.
On the other hand, a guaranteed income annuity provides you with the security of knowing exactly how much you will receive each year, allowing you to build your retirement plans accordingly.
The potential to receive an even higher income
A number of providers offer higher than standard annuity rates, reflecting individual health and lifestyle. For example, someone who has high blood pressure, diabetes or cholesterol levels, or has suffered an acute health condition, such as cancer or stroke or heart attack can be awarded much higher than standard rates, simply by disclosing their health history.
Other factors such as your occupation, where you live, or whether and how much you smoke can also lead to higher terms.
As with other insurance-based arrangements, annuity rates vary between providers and therefore it is always worth shopping around or asking an adviser to carry out a full market review to ensure you get the best possible terms.
The wide variety of options
If you are interested in taking out an annuity, you will be pleased to hear that you have a wide variety of different options to choose from. This can give you much greater peace of mind throughout your retirement.
For example, you could choose to link your annuity to the rate of inflation, which means that the amount you receive rises in line with the cost of living. This is known as an “escalating annuity”.
Alternatively, you could opt for a joint life annuity, which pays you an income until you pass away and then pays it to your partner or spouse until their death. This may be at a lower rate of income.
Some annuity plans can also provide for a capital sum payment on death.
Do note, however, that the more “extras” added to the base annuity plan, the lower the starting point of the income payments.
Speaking to a planner can help you to decide whether an annuity is right for your needs
Of course, while annuities can have some valuable benefits, they are not suitable for everyone as they have some drawbacks.
For example, one of their biggest issues is the lack of true flexibility. There are very few circumstances where you can reverse an annuity once you have bought one, which can be a problem if your plans or personal circumstances change.
If you would like to understand more about whether an annuity could be right for you, you might benefit from a conversation with a professional financial planner. Through an understanding of your financial situation and retirement goals, we can help you to reach an informed decision, giving you greater confidence that you will have the retirement you want.
Get in touch
If you want to know more about whether an annuity could be right for you, we can help. Email firstname.lastname@example.org or call us on 01275 462 469.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.