3 reasons why opting for an annuity can still make sense 

Story

While annuities are not as popular as they once were, a significant number of retirees are still purchasing them. Here’s why Austin Broad, group head of advice at AFH, thinks they may be worth considering.

Nearly five years ago, George Osborne turned the pensions industry on its head. The move by the Chancellor freed those approaching retirement from restrictions on the amount of income drawdown from their pension pots, and by implication, from the near-default option for many retirees of having to buy an annuity. Suddenly retirees were free to invest their money in other vehicles or blow it all on a Lamborghini.

Perhaps unsurprisingly, they rushed to embrace their new-found freedom. Data from the Association of British Insurers (ABI) shows that 74,000 annuities were sold in the quarter just before the pension changes were announced. That number fell to 18,000 in the second quarter of 2015, soon after Mr Osborne’s changes came into effect.

It is not only the new freedom that has led pensioners to vote with their feet. Poor annuity rates, a product of longer-term low interest rates and increased life expectancies, have seen annuities fall from favour.

But annuities are yet to die out, with 12% of retirees still choosing to purchase them, according to the Financial Conduct Authority. Here are some reasons why you might still choose to opt for an annuity.

Certainty of income

For those without a sustainable lifetime income plan, annuities could provide certainty of income for life with ways in which capital could be protected against death, in some circumstances to a greater extent than drawdown where the investor faces full liability for market risks.

Buying an annuity means you will not run out of money, no matter how long you live: the provider will keep paying out throughout your life.

Improved flexibility

Amid all the pension changes announced in 2014, annuities were made more flexible. Restrictions concerning widows’ pensions were removed so that anyone could be nominated as a beneficiary on death.

For the beneficiaries of a pension on death before age 75, annuity income would be paid to the survivor free of income tax liability. Rules on value protection were extended such that capital could be protected to a far greater extent in the event of death.

Guaranteed annuity rates

Annuity rates may be low, But some pensions have a valuable guaranteed annuity rate (GAR) that means you will get a higher income when buying an annuity.

This may tip the balance in favour of a lifetime income above a drawdown product, and it is worth talking to an investment professional before giving up one of these guarantees.

When deciding on how to structure your drawdown, consider how secure your sustainable lifetime plan is, and if an annuity could deliver more security, as well as valuable estate planning options, tax efficiency and certainty to your plan. 

The suitability of investments is based upon individual circumstances. You should contact a financial adviser before proceeding with any course of action.

This article was originally published on The Telegraph website on 7 February 2019.

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