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Rumours of the annuity’s demise have been greatly exaggerated

Last year’s budget speech by the Chancellor George Osborne caused a huge crash in the sales of annuities.

As the announcement clarified that caps and restrictions were being lifted on pension funds, allowing pensioners to control their own pension funds and generate their own retirement income, sales fell and annuity rates dwindled with them.

Annuities were once the only option for many retirees; they provided a guaranteed income for a fixed-term or for life based on the value of your pension fund. But as interest rates declined, so did the returns pensioners could receive and the product had become much-maligned by the at-retirement market; many never feeling that they’d see the full value of the fund in their lifetime.

But despite the recent reforms allowing pension freedoms for all, annuities should definitely not be rules out of your pension planning – and could actually be an essential element to a secure financial future.

The biggest advantage of an annuity is that you can be safe in the knowledge that your income is protected right through until the end of your life. And while annuity rates are currently low, with interest rates expected to rise, some experts believe that we could see annuities swing back into favour in the coming years.

It should also be considered that one retirement option alone may not be the ideal situation for your circumstances. Many may be able to take advantage of the pension freedoms, by using a portion your fund to purchase an annuity, securing a stable and steady income stream, while using income drawdown methods for more sporadic purchases or investments.

Remember that retirees can always take advantage of their open market option and compare your annuity for a better deal. If you have a pre-existing medical conditions, or a lifestyle choice that could lower life expectancy (such as being a smoker), you could be entitled to an impaired health or enhanced annuity, paying out higher rates of income; it’s something always worth enquiring about.

Annuities, then: while the market crashed following last year’s pension reform announcement, we’ve definitely not seen the last of the annuity. In fact, they can be an integral part to many people’s financial future, and it would not be wise to dismiss them entirely, either now or in the future.

 

Author: Ryan Smith
Posted: Wednesday, April 08, 2015 | 5:00:50 PM


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