Annuity rates may have been holding up recently, but few people believe that there is much scope for them to do anything other than fall in future. The problem is that we are living longer than previous generations and that interest rates are unlikely to recover for some time, This is why those retiring today can expect to have an income that is less than half the amount that a similarly sized pension fund might have secured two decades ago.
Choices of annuities
At one time, the decisions to be made at retirement were simply whether or not (after taking any tax free cash required) to take a lower initial income in return for future growth, and if a joint-life income was required (and if so on what basis).
Inflation-proofing an income (although even RPI linked annuities may have a cap on annual growth) may sound a good idea, but the initial income is much lower and it can take years for the difference to be made up. But even with a 3% inflation factor, the income for a £100,000 pension fund would take about 11 years before the indexed income matches the level income that could have been taken. In fact the accumulated shortfall lasts for a further nine years, or so. This means that you really need to live for two decades to make up the shortfall, in monetary terms.
Recent developments have seen the advent of new forms of annuity that provide an income for a set period and then a return of (some) capital that allows you once again to decide on the basis of future income – whether through a lifetime annuity or another temporary arrangement.
Known as temporary annuities, these have different considerations because the income is only fixed for something like three to five years (although longer terms may be possible). The choice then is whether annuity rates are likely to recover sufficiently during the temporary income period to make up for the fact that you have less capital to purchase the ‘next’ annuity, allowing for your increased age.
Alternatives
Other forms of annuity are available including so-called with profits annuities which offer the potential for a higher income in later years, but also carry the risk that this will not be possible, in which case you could become locked-in to an initial level of income that is likely to be lower than had you simply purchased a guaranteed annuity.
The other option available to most people is drawdown, or pension fund withdrawal, of which there are now two forms, flexible and capped.
Reviewing existing arrangements
What falling annuity rates make clear is that it is essential regularly to review your pension planning arrangements in order to ensure that you are saving sufficient to provide a comfortable retirement, and that your existing plans are also regularly checked so that you can be satisfied that the investment performance and asset allocation strategies are suitable for your intended retirement timetable. It is also worth bearing in mind that some older plans may well carry higher charges than might apply to modern alternatives.
It is important regularly to review your investments to ensure that they are not out of kilter with plan or, indeed, carry greater risk than is currently acceptable.
We at Neves have close links with professional advisers who can help you to make the right decisions for you. If you would like us to put you in touch with an adviser then please contact us.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE
