Annuities: Are they the ideal solution to guarantee an income in retirement?

Posted by Peter McGahan

Having endured the many years of volatile performance on our pension funds, the time comes for us to secure an income with that money.

Annuity retirement income

At retirement age we have the choice of using our pension fund to buy an annuity, take a 'drawdown' contract, or leave the fund invested until such times as we need it. 

A drawdown involves taking both your tax-free cash lump-sum and a reduced income which is offered to you between an upper and lower limit. Taking an income at the higher amount will put your remaining fund under more pressure than the lower.

It suits those who don’t want to immediately secure an income with their pension fund as this would then be fixed forever. An investor may not want to add to their taxable income straight away nor might they want to want to either encash their fund (which may have been negatively affected by stock markets) to buy the annuity, or buy an annuity at today’s poor rates and so they might defer - this is draw down.

All too often I have seen investors being sold into an expensive drawdown contract when all they needed to do was leave the money invested in their pension until they needed it, but some unscrupulous ‘advisers’ wouldn’t get paid commission if they did that would they?

And so the time comes to choose an annuity. This can be a very complicated choice.

Confronted with that choice however, many customers arrive in front of an adviser to secure one of the biggest investments of their life yet are unfortunately faced with an adviser who is not a specialist in their field. Most software available to financial advisers can easily decide in seconds which is the best annuity to purchase, but the skill will be in deciding when to buy the annuity.

This is a highly complicated procedure taking into account anything from a one to 25 year view on the economy and in turn interest rate and monetary policy, coupled with a view on the stock market, health and tax position of the annuitant to name just a slither of the items to consider.

For example, with the Treasury's quantitative easing plan, gilts have soared in price, driving yields through the floor, so much so that annuity rates are close to their all time low. Annuity rates are closely matched to gilt rates maturing 15 years from now. A purchaser of an annuity will now be buying with a low stock market price coupled with rock bottom annuity rates - as bad a mixture as you can get.

And so it makes sense where possible today to delay taking your annuity and keep a close eye on any moves to sell off gilts, on how the economy is performing and also how the stock market (not necessarily related to the economy) is behaving.

When the time arises to purchase the annuity you should seek the advice of a fee based independent financial adviser who will then assess through the software they have available who is offering the best terms available.

For example if you were considered to be of ill health some companies will offer higher annuity rates.

An annuity for many is an ideal solution in that an income is set and guaranteed at the outset and then locked for life allowing investors the chance to maximise income and budget for the remainder of their retirement.

However, given the complexity of the decision making process of one of your biggest decisions, be sure to seek the advice of a specialist fee based independent financial adviser.

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