If an annuity is not the answer for my pension, what was the question?
First published 22 January 2014 • Updated 13 March 2018
Annuities have come under fire lately, so what are your options? By Danny Cox.
You’ve saved into various pension pots over your working lifetime, and are now approaching the time to turn years of contributions and investment growth into income. You’ve also seen the headline about annuities – the financial product which converts private pension pots into guaranteed income – being poor value at the moment due to low interest rates and people living longer. So, what should you do?
Five years before…
Ideally, planning your financial journey into retirement should start no later than five years before you actually need to start drawing income from your pensions or other investments. It is during this time you can alter the investment approach of your pension and investments to prepare them to become income producing.
Will an annuity suit me?
Annuities tend to suit those who need a guaranteed income with no investment risk. These investors should look to lock in gains and derisk their pension pots by gradually moving their investments from the stock market to cash in the five years leading up to annuity purchase. Importantly, you don’t need to buy your annuity from your pension provider and can improve your income by as much as 40 per cent by shopping around for the best deal. The best way to shop around for an annuity is to use an annuity broker or independent financial adviser. Try using unbiased.co.uk’s ‘find an adviser’ checklist to help you ask the right questions.
Wait for rates?
If after shopping around you are still unhappy with rates offered, you have the option to delay buying an annuity with the hope that rates will recover as interest rates rise and also increase as you get older. However, a rise in rates in the short term isn’t a certainty.
What else can I do?
The most popular alternative to an annuity is an income drawdown plan. This is where your pension pot remains invested and you draw income instead of buying an annuity. Over time an income drawdown plan should give you a better, rising income than an annuity. However this depends on a number of factors not least how your investments perform. Income drawdown is a riskier option because the value of your pension pot will go down at times and your income is not guaranteed. Therefore income drawdown plans tend to suit those who are happy with extra risk and usually have other sources of income in retirement, meaning they can afford to take risk with some of their retirement income.
If your pension savings are large enough you may decide to mix and match annuity and income drawdown, to give yourself the best of both worlds.
Don’t forget inflation
Whichever option(s) you decide to use to draw your pensions, you need to consider the best solution which will provide income throughout yours and your spouse’s retirement, taking into consideration rising price inflation over what is likely to be a 20 year or more retirement.
There are many financial decisions to be made at retirement and many questions to ask yourself about your income needs and aspirations. Some of these decisions you will be confident to make yourself and some you may want to consider seeking help. If you are unsure, take advice from an at-retirement specialist.
Please note: The opinions, beliefs and viewpoints expressed by our contributing authors do not necessarily reflect the opinions, beliefs and viewpoints of unbiased.co.uk.